EFFORTS BY the European Commission to combat a European Union-wide VAT fraud which has cost some member states, including the United Kingdom, tens of billions in lost revenues are being opposed by Ireland along with some other EU governments.
Under the so-called “carousel” fraud, criminals exploit the ability of companies to import goods free of VAT from within the European Union.
They then charge VAT when they sell products on, but fail to hand it up to tax authorities. Losses are multiplied if a company which buys such a product then claims back VAT which they have paid.
The fraud, particularly in low-weight, high-value products such as mobile phones, MP3 players, computer chips, hand-held computers, games consoles, and, more recently, contact lenses, has cost the UK up to €12 billion a year, while the Germans, Austrians and Italians have suffered heavy losses also.
The European Commission now proposes to tighten EU VAT rules, restricting the conditions under which products can qualify for VAT exemptions when they are being exported to a business in another member state.
However, it is the commission’s proposal to make suppliers and purchasers “jointly and severally liable” for VAT fraud losses that has caused the opposition of both the Department of Finance and the Revenue Commissioners, and tax authorities in a number of other EU states.
Speaking before the Oireachtas European Union Scrutiny Committee last week, Department of Finance official Pat Murphy described the measure as “disproportionate” and unworkable.
“This seems to be disproportionate. In addition, there are difficulties in establishing the actual liability of the supplier when this fraud occurs,” Mr Murphy said.
Carousel frauds in Ireland were at their height in 2002 when a number of Irish businesses acted as “conduit traders”, receiving goods from other EU states and exporting them on to the UK.
The Irish exchequer did not lose out because the criminals were careful not to breach Irish VAT law, but the British exchequer did suffer when the purchasing company failed to hand up VAT, and disappeared.
The commission’s proposals, first circulated last December, are opposed by a number of other member states, and months of negotiation lie ahead before a settlement is reached.
If accepted, however, those involved in business-to-business, cross-border transactions within the EU would be “made jointly and severally liable” for any subsequent loss of VAT.
The Revenue Commissioners use the “jointly and severally” rule by making exhibition organisers jointly responsible for VAT payments due from those who display at their events.
However, if accepted, the commission’s measure would be the first time that the parties involved in a cross-border business transaction would be made liable for any tax losses incurred.
