£8.4bn VAT Losses Force New Tax Laws

Following the announcement from HMRC that VAT rules will change as of December, a Belgian taskforce set to fight European fraud has published figures that show the UK Government’s evaluation to be grossly low.

In a business brief last week HM Revenue & Customs proposed reverse charge accounting for any business trading in mobile telephone, computer chips and various other goods. This would switch responsibility to the purchaser, rather than the seller to account for VAT on the transaction.

Given the continued scale of attempted Missing Trader Intra-Community (MTIC) fraud, also known as carousel fraud, the Government remains determined to introduce reverse charge accounting at the earliest opportunity.

HMRC fully expects this to be implemented 10 weeks from now on December 1st 2006. However, implementation in the UK is dependent upon the EU derogation, the timetable for which is not fixed.

The Government estimates VAT fraud cost the treasury £1.9bn in lost tax revenue over 2004/2005. The estimate for 2005/2006 will not be published until Gordon Brown’s pre-budget report later this year.

However, the Belgians analysed information produced by Eurocanet, a European commission set up between seven Member States to control companies active in the field Carousel Frauds, and claims that their report gives accurate estimate for VAT fraud losses across the EU.

The UK suffered considerably more than the rest of Europe, losing £8.4bn. Spain lost £1.7bn, with Italy and Germany not far behind on £1.5bn and £1.3bn respectively. France only lost £1bn in lost tax revenue.

Herve Jamar, the Belgian state secretary, who worked on the report  said Britain has a "unique problem".

"We estimate the loss to Britain to amount to 3.7bn Euros with the Dubai connection adding some 8bn Euros to this figure. It’s clear there are very close commercial links between Britain and Dubai." he added.

HMRC has set December 1st as the date of implementation, as it believes that will give companies enough time to alter and upgrade the software of all their accounting systems. They recognise that they will need to be involved in the developments and delivery of new software systems so are working intensively with software developers to provide them with the various requirements and specifications for submission of reverse charge sales lists. HMRC hopes to release a first version by the end of the month.

Customs fully intends to make the whole process as open as possible and is inviting business to work with them to ensure that all the information and guidance necessary is made available. Draft guidance will be available for comment some time in October.

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