It looks as though the EU will ratify the UK’s proposed ‘reverse charge’ VAT regime on mobile phones and some other electronic goods. If so, the new rules could come apply from as soon as 1 December. Time for a refresher course …
What’s the problem?
Carousel fraud is costing the taxman a lot of money; HMRC estimates between £1.12 and £1.9bn in 2004/05, an independent report reckons £2.5bn in the year to June 2006. Whatever, it’s a big number.

How does it work?
Goods are imported from one EU member state free of VAT. They’re then sold from one business to another at a VAT-inclusive price. The process will be repeated several times, and finally the goods are exported to another country.
The purchasers all along the chain reclaim the VAT, including a refund when the goods are exported to another EU country, but the original seller disappears without coughing up the VAT charged when the items were imported in the first place. And the same goods can be imported and exported several times and across several EU borders.

How’s the policing going?
HMRC has made carousel fraud a priority, with some recent notable successes. More than 1,400 staff are deployed specifically to tackle this type of crime now. It has established a database called Nemesis to register all imported and exported mobile phones so the authorities can tell if they are being regularly imported and exported. A joint operation by UK and German tax officials seized more than 30,000 mobile phones a couple of months ago. And recently the Dutch authorities shut down the First Curacao International Bank, allegedly being used by as many as 2,500 UK residents to clear carousel payments.
Government figures suggest that trade in goods associated with the fraud fell to £1.2bn in August compared with £1.5bn the month before. But that’s still a couple of NHS hospitals’ worth of lost tax revenue each month; and HMRC and the Treasury simply don’t have enough investigators or enough time.

What’s the solution?
It’s easier to enforce a catch-all regime in the expectation that the rule change will remove the opportunity of fraud.
So HMRC proposes to shift the VAT payment obligation on to the buyer rather than the seller, at least for business-to-business supplies of specific items including mobile phones and game consoles. Only the final retailer would be able to charge VAT – No tax cash changes hands along the chain.

In short:
• If you are buying the specific goods covered by the scheme, you will be responsible for both claiming back the input tax and paying the output tax on the purchase.
• If you are selling such goods on to another business, you will not collect the VAT on the sale but you will need to detail the tax for the purchaser to pay.

So everyone who buys and sells mobile phones is covered by this?
No, the reverse charge will apply only to sales within the UK where specified goods are purchased by a VAT-registered business for business purposes. Any sales to non-business customers are unaffected and the normal VAT rules continue to apply.
The seller will be required to take “reasonable steps” to establish that the reverse charge should apply – which means checking that the purchaser is registered for VAT and is intending to use the goods for a business purpose. This isn’t going to be enforced too heavily though: “a supplier who has taken such reasonable steps will not be required to account for VAT if his customer fails to apply the reverse charge”.

And will it apply to all transactions?
There’s a limit below which the reverse charge will not apply, and currently that’s £1,000 exclusive of VAT. Normal VAT accounting rules will apply to transactions below this limit. Opportunities here for a little bit of tweaking? HMRC says sternly “there will be measures to prevent manipulation of this de minimis limit”.

So all VAT accounting systems will have to be changed overnight?
HMRC promises a “light touch” for honest late starters, saying it recognises that not every affected business will be able to introduce changes to accounting and IT systems by 1 December 2006 and declaring it will look favourably on “interim arrangements”. At first, some businesses will have to do the new VAT accounting by hand.

Any other problems?
You want any more? The complexity of the tax regime is going to rocket, especially for businesses that trade in a variety of goods – some covered by reverse-charge, others liable for VAT under the existing rules. There’s still no final confirmation of the limits below which reverse charge accounting would not apply, so if you’re not selling enough phones there’ll be no change to your VAT accounting … until you hit the limit of £1,000 ex VAT.
One more thing – suppliers will have to submit a “reverse charge sales list” to HMRC (similar to EC Sales Lists) listing customer and transaction details where the reverse charge has been applied.

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