Carousel fraud: put the brakes on

Carousel fraud is a growing problem for the UK and Europe. The Treasury is
set to lose £2 to £3bn in the tax year 2005/06 according to the Public Accounts
Committee. Across the EU as much as £40bn annually could be going missing,
according to EU tax commissioner László Kovács

It’s too early to say if, in the UK, the reverse charge mechanism, which
transfers the obligation to account for VAT from the seller to the purchaser,
for certain products supplied within the UK, is reducing these massive losses,
although HMRC says it is making progress.

What is needed is a co-ordinated, targeted Europe-wide approach.

Individually, each country is doing what it can to try to stem the losses and
let’s hope that the UK’s reverse charge mechanism will bite. However, since the
fraudsters largely operate by exploiting differences between the tax rules
across the EU, such unilateral approaches are likely to fail to wholly address
the problem. In the short term, they may reduce the net losses from one country
but are unlikely to have a major impact on Europe as a whole.

Shuffling the problem from one member state to another in a bizarre
pass-the-parcel game of national nimbyism means, collectively, they all end up
losers.

Leaving aside arguments about the relative efficacies of the various
mechanisms proposed to combat carousel fraud, they tend to all operate in a
similar broad-brush approach, generally applying additional compliance burdens
on taxpayers. The effect of this approach is that ‘good’ and ‘bad’ taxpayers are
hit equally hard and law abiding companies (often already paying large VAT
bills) have to jump through extra compliance hoops for the privilege.

Again, taking a slightly wider perspective, it could be argued that such a
compliance burden might actually put large, law abiding companies off the idea
of doing business in certain member states.

Indeed, administrative changes to enhance exchange of information and mutual
co-operation between member states may well be the route to achieving a viable
solution rather than far-reaching structural changes to VAT rules.

There’s no ‘silver bullet’ – if it was easy, we wouldn’t have a problem. But
it’s a serious situation and for all our sakes, let’s take a targeted approach.

Gary Harley is head of indirect tax at KPMG