UK leads compromise on £30bn EU VAT fraud threat

The UK has this week brokered a compromise plan to help the European Union (EU) reduce the estimated £30bn VAT 'Missing Trader' fraud threat on the international sales of mobile phones, micro-chips and other high-value commodities.

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The agreement comes following the European Commission's (EC) warning last week that that it would withdraw the UK's 'Missing Trader' VAT fraud mechanism that was designed to combat this issue, at a potential cost to the UK economy of up to £2bn per annum.

UK breakthrough as EC threatens to withdraw its special exemption

The UK was granted special permission (derogation) by the EU to exempt the sale of items at high-risk of fraud in June 2007 – the UK is the largest single target of such EU-wide frauds.  However, last week the EC warned the UK that it was not prepared to extend this derogation beyond 31 December 2013.

The UK has therefore worked to secure a European-wide deal for a rapid-response mechanism to the problem, which includes an option for any EU country that believes it is facing significant amounts of VAT fraud to use the VAT exemption at short notice.  A number of countries had been blocking this idea since 2012 because of a dispute over which country might lose out on tax revenues.

The UK compromise means EU finance ministers will now pass the measure on 21 June when they next meet in Luxembourg.

Missing trader fraud costs the UK an estimated £2bn per annum – and up to £30bn to the EU as a whole.  This is a very timely breakthrough for the UK as the EC had indicated that its temporary VAT exemption would not be extended.  Having seen off opposition in some countries, the new anti-fraud mechanism will be up and running in a few months.

Cross-border European VAT fraud rampant

'Missing Trader' fraud involves large, organised criminal gangs taking advantage of some of the flaws in the pan-European VAT systems.  Fraudsters obtain a VAT number in an EU country which enables them to buy small, high-value goods on the pretence that they will then sell them in another EU country – a transaction which is VAT free.  However, they actually sell the goods locally with a VAT charge (e.g. 20% in the UK) which they then retain instead of paying over to the local tax authorities.  A variation of this, known as 'Carousel Fraud' involves the same goods being sold and re-sold many times over. Some cases of such fraud run into the hundreds of millions of pounds before the criminals are caught or close down their operations and vanish.

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