VAT fraud is out of control, House of Lords claims

Report into carousel fraud claims that Reverse Charge which comes into force on 1 June, will cause fraud to 'mutate into other sectors'

HM Revenue and Customs’ (HMRC) Extended Verification strategy is an ‘inefficient and unsustainable’ use of resources and imposes a ‘significant burden’ on smaller firms.

This was the findings of a detailed study into MTIC fraud published by a House of Lords sub-committee (economic and financial affairs and international trade) last week.

Entitled European Union – Twentieth Report – the report concluded that MTIC fraud is ‘out of control’ and the soon to be implemented Reverse Charge strategy is a ‘temporary solution’ which is likely to cause the fraud to ‘mutate into other sectors’.

At present Reverse Charge, which comes into force on Friday, levies the tax onto the buyer rather than the seller of goods, and is limited to the CPU and mobile phone industry in the UK.

The report stated: “As things stand, HMRC has no option but to continue with extended verification, however they need to take real and substantive steps to ensure that their actions do not damage the innocent and are proportionate to the scale of the fraud.”

“We note that, according to the Paymaster General, this approach has led to a ‘massive drop’ in attempted MTIC fraud in 2006/07. This appears to justify the approach, however the system of extended verification is an inefficient and unsustainable use of HMRC’s resources, and does impose a significant burden on smaller firms.”

“The reverse charge will stop MTIC fraud where it has been most prevalent, but we expect the fraud to migrate and mutate. Consequently we anticipate that when the UK’s derogation is reviewed in two years’ time there will be requests for the reverse charge scheme to be expanded, either to other member states or other products, or both.

The report concluded: “The current mechanism for intra-community VAT transactions is not sustainable. While the amount of money being lost in the UK may have fallen in 2006/07, mutation into other industry sectors will bring a subsequent rise in fraud levels. We believe that prevention is better than cure.

“A wide ranging change to the VAT system is required and the Government should start discussions with the European Commission and other Member States on the form this should take.”

To see the report in full click here