Government acts over high-tech VAT fraud

The UK government is stepping up its fight against criminals who commit VAT fraud by moving IT products between European countries

The UK government has applied to opt out of Europe-wide laws governing VAT, in an attempt to clamp down on criminals who use computer components to commit fraud.

Her Majesty's Revenue and Customs (HMRC) said on Friday it would be able to more effectively combat "carousel fraud" if the European Commission allows the changes to UK law.

Carousel fraud, also called missing trader fraud, occurs when a company charges VAT on a sale of goods but doesn't return it to the government. Typically, those involved will move wholesale goods such a mobile phones and processors between European countries.

In the past, some UK technology companies have suffered — and in some cases gone bust — when they bought goods that had previously been used in such a fraud. They were unable to recover the VAT that they paid when they bought the goods, because that VAT had not been paid to the government by the fraudsters.

The UK government wants to pull the rug from under fraudsters by asking if it can change the way VAT is handled. At present, every link in such a chain pays VAT and then recovers it from the government. Under the government's proposal, the tax would only be levied at the end of the chain when the goods are sold to UK consumers.

"We're requesting to operate under different conditions, by taking out the mechanism that criminals use to commit fraud," an HMRC spokeswoman told ZDNet UK.

"I hope that the Commission and other member states will look favourably on our request, and that the UK can implement the proposed changes as soon as possible," said Dawn Primarolo MP, the Paymaster General, in a statement.

Germany and Austria have also put in a request to opt out of part of European VAT law.

HMRC said that VAT losses from carousel fraud are estimated to be between £1.12bn and £1.90bn for 2004-05.

The UK government request comes after the European Court of Justice dealt a blow to the UK's efforts to tackle carousel fraudsters. Earlier this month the court ruled that three companies, including two computer processor resellers, were entitled to reimbursement of their VAT.

The companies had been fighting a decision by the UK VAT and Duties Tribunal which said they could not claim VAT back on electronics equipment that may have been used in a carousel fraud.

One of the technology companies involved in this case was forced to cease trading, after the withdrawal of a VAT refund of £13.2m.