EU Referendum

Showing posts with label VAT fraud. Show all posts

Polizei_2[i-Polizei_2]German police and tax officials have raided offices of Deutsche Bank and RWE in an investigation of an €180million fraud involving carbon credits. Both firms, we are told, insist they are not the target of the probe which has so far led to 230 offices and homes being raided, with up to 150 suspects at 50 companies being targeted.

The investigation is the largest carbon market probe to date and follows a series of raids across Europe designed to tackle our old friend carousel fraud. In this particular version, carbon traders collect VAT on traded carbon credits before disappearing without handing the tax revenue to the exchequer.

To that extent, the fact that carbon credits are involved is an irrelevance. In recent times, mobile phones and computer chips have been the vehicles for the fraud. With special rules now applying to these products, it was inevitable that fraudsters would find another target – and carbon credits are it.

Current estimates of losses to this fraud for last year stand at €5bn (£4.3bn) and, as I keep pointing out, this is real money, and on a scale far greater than your common-or-garden bank raid.

Henry Derwent, chief executive of the International Emissions Trading Association, has welcomed the investigation and urged the authorities to come down hard on anyone found guilty of carbon fraud. He is worried that this fraud has "quite unfairly damaged the perception of the European emissions trading scheme and potentially carbon trading as a whole."

There is no reason why this should be the case, though – any more than the fraud has damaged mobile phones or computer chips or, for that matter, the reputation of VAT which is so inherently prone to fraud that it should have been ditched long ago.

However, perhaps the real reason for the sloth of the authorities is that the fraud is providing plenty of "green jobs". That the "workers" are the German police, who coincidentally wear green uniforms, is neither here nor there.

COMMENT THREAD

carousel[i-carousel]In the latest instalment of that curious crime known as "carousel tax fraud", Reuters is reporting that measures to prevent fraud in carbon permit trading may not be working. A patchwork of unilateral actions by a few EU member states, it says, could serve only to push the activity into neighbouring states.

The news agency has carried out its own investigation into this scam and found that a mix of tax loopholes, lack of regulatory oversight and easy market access that could open the EU's $90 billion emissions trading scheme to abuse. Investment banks and brokers are thus worried they may have to foot unpaid tax bills left after any fraud or face legal action for having traded unknowingly with anyone charged.

It was early last month that we reported on attempts to rob the taxpayers of EU member states of hundreds of millions, and although the UK took quick action to head off the scam at the pass, its efforts to catch the crooks have been unsuccessful.

High-profile action by HM Revenue and Customs (HMRC), which raided 27 properties around London following a 7-month investigation into a suspected £38 million fraud, had nine people were arrested. All have since been released without charge.

David Bates, a director at emissions broker CarbonDesk makes the obvious point. "It's put the innocent intermediaries in a very awkward position of responsibility and liability, which isn't fair," he says. And that is indeed the case. By the time the authorities pick up the fraud, the original perpetrators have usually long gone, leaving the downstream firms, who have been unwittingly scammed, holding the baby.

The latest target is the spot trade in carbon permits, an unregulated market worth tens of billions of dollars. It is particularly attractive because of its tax treatment in the EU and lack of oversight by financial watchdogs. But the irony of it is that, while governments stand to lose shed-loads through fraud, they make nothing because the VAT is eventually reclaimed anyway.

Furthermore, as James Emanuel, a director at broker CantorCO2e, says: "Carbon permits are a tax on emissions, and applying VAT to them is effectively putting a tax on a tax, which is kind of ludicrous."

“Ludicrous" is not a bad name to apply to the tax as a whole, which is estimated to cost European taxpayers some £40 billion a year, with British losses in 2005–06 running to between £2 to £3 billion.

To stem the losses on carbon credits, France exempted carbon permits from VAT in June. In July, Britain and the Netherlands followed France's lead, altering their tax treatment of the permits. However, there is nothing to stop fraudsters moving on to other countries such as Spain and Germany, where large amounts of carbon permits are traded.

The EU Commission, of course, would not comment on specific countries at risk and other countries are keeping schtum. So too, with the notable exception of Reuters, is the media in general.

It has always been a strange facet of this gigantic crime that publicity has been sparse. It is as if the media simply cannot cope with the scale of the losses, or that fact that, arising from an EU tax, the establishment does not want to acknowledge by how much it has been conned.

Interestingly, wherever this tax system exists, there is fraud and, wherever there is fraud it seems, the perpetrators get away with it.

In the final analysis though, the ultimate beneficiary will be the EU. Virtually unreported in this country, the Council recently adopted a proposal to set up "Eurofisc": a common operational structure "allowing" Member States to take rapid action in the fight against cross-border VAT fraud.

Soon enough, there will be an executive agency to run this system, with more eurocrats to feed at the tit of public finance, tightening economic and therefore political integration even further. Once again, we see engrenage in action – first create the problem and then come up with a solution that requires more integration. And no one seems to give a damn.

COMMENT THREAD

gem+heist[i-gem+heist]Reinforcing precisely the point I made about VAT fraud, you get thieves making off with "hundreds of millions" of our money, and the media barely mentions it.

Yet, a "gem heist" taking a "mere" £40 million – no doubt covered by insurance – and the news goes straight to the front page.

There is something very distorted about media values. Over term, VAT fraud has robbed EU member states of at least £10 billion (if not more), which is crime on a colossal scale. Yet none of our hacks – much less the politicians – seem to be able to take it seriously.

The lesson for potential crooks is obvious. Don't bother with the high-profile heists. Just rip off the taxpayers of Europe (taking as your role model the politicians) and the chances are you will get away with it unnoticed – and certainly unreported.

COMMENT THREAD

Something which perhaps should be given more publicity than it is getting is the bizarre story retailed in The Financial Times about the urgent action taken by HMG to zero rate carbon credits to put a lid on VAT fraud.

That carbon credits – the ultimate "snake oil" product – should have become a major vehicle for VAT fraud is hugely ironic, but one is not comforted by the FT's assurance that: "Losses to the exchequer so far are unlikely to have exceeded a few hundred million pounds."

Er ... "few hundred million pounds"? If this had been a robbery of that magnitude, it would be spread all over the front pages. So why the diffidence? This is major-league theft – real money, straight out of our pockets.

Such is the seriousness of the situation that the Treasury is warning that "there now exists a substantiated and increasing risk of the UK becoming a major target for the fraudsters during the next few months". It had taken the action even though changes to VAT need to be agreed by the EU Commission, without even waiting for formal approval.

The scam, it seems, also has international dimensions, with similar action having been taken by France and the Netherlands, pre-empting what is feared to be fraud on an industrial scale, with billions at risk.

This, however, is the tip of the iceberg, exposing yet another vulnerability in a system massively prone to fraud which has cost the exchequers of EU countries billions.

Yet the scale of the fraud is matched only by the degree of under-reporting in the media, which seems not to register the magnitude of this crime and the fact that we are indeed talking about real money. This is not a victim-less crime.

The real problem, though, is the inherent nature of VAT itself and the only long-term solution is to abandon the system completely. Yet that very system is locked into the very heart of the EU – another colossal failure of the project. That, presumably, is why no one wants to talk about it.

And that, this time, the fraud should be perpetrated on the back of what amounts to another fraud – carbon credits – should give us all pause for thought.

COMMENT THREAD

MISC+-+tax+return[i-MISC+-+tax+return]The scandal of the billions draining from the public purse in VAT fraud is matched only by the total inability of the "colleagues" to do something about it. Time and time again, proposals have been made to tighten up the system, only then to founder as the complexities or political disagreements become apparent.

But, all things come to them who wait. At last, the colleagues have found something they can agree on which, the commission claims will "tackle fraud effectively".

So, are they to change the system? Er… no.

The brilliant wheeze they have come up with is to change the "tax period" from three months at present, to one month. This means that traders who previously had to submit their VAT returns four times a year now have to do it twelve times.

And, since the tax becomes due in the tax period that it has been charged – regardless as to whether it has been collected – this means that many traders will suffer additional strain on their cash flows, just at a time when banks are tightening up their lending. Trading terms often extend to one month of more for payment so many traders will have to fund their VAT bills from their own pockets and hope that they then get paid by their customers.

However, according to the commission, member states may extend the tax period to up to a year for buyers or customers making transactions to a value of more than €200 000 per calendar year – which is pretty small beer for the average trader.

Despite this, we are all highly reassured to learn from the commission that, according to the various consultations carried out within the private sector, "these measures will not impose an additional administrative burden on economic operators."

This must be true, because the commission has said so. Quadrupling the amount of paperwork and having to pay tax up to two months earlier could not possibly "impose an additional administrative burden on economic operators."

All this, of course, is so that member states can pick up suspicious transactions earlier and pass information between member states quicker, in order to detect fraudsters. These are, in the nature of things, very small in number compared with the number of legitimate traders so, for want of doing something that is actually effective, the commission is demanding that everyone multiplies their own workloads and pays in money earlier - often before they have even received their own payments.

That, by any measure, is collective punishment.

COMMENT THREAD

MISC+-+Gordian+knot[i-MISC+-+Gordian+knot]One of the many "black holes" in the MSM reporting of EU affairs is the coverage of the continued drain on our finances through VAT fraud – and the attempts of the commission to plug the loopholes.

These frauds are estimated to cost the taxpayers of EU member states some £40 billion (€60 billion) a year, and in 2005–06, the level of fraud increased to its highest ever level, with the estimated cash loss to our own exchequer of between £2-3 billion.

Yet, despite the enormous sums, involving a real loss of money, there is none of the overt concern or publicity that has accompanied other, lesser crimes – and no media source – to our knowledge – has ever joined up the dots and observed that the essence of the VAT system makes it wide open to fraud.

However, if the media are unconcerned, the commission is still trying to sort out the mess. Thus, yesterday, it launched its latest series of proposals, although even the officials in the heart of darkness are uncertain as to their effect.

Almost without precedent was the diffidence with which the presentation was made, the press release taking about two “possible far-reaching measures” on VAT, noting that the changes offered had the potential considerably to reduce the phenomenon of 'missing trader' fraud. However, it went on, they also pose potential problems that would need to be examined further before either system could be agreed.

What the commission is talking about is a "generalised reverse charge system". It is of such mind-boggling complexity that even the officials concede that it will create as many problems as it solves.

Although the commission argues that the new system would reduce "missing trader" fraud, it admits that it would "by no means solves other types of fraud". Furthermore, it says, it would potentially cause cash-flow difficulties for traders, in particular for SMEs, which would have to pre-finance the VAT in transactions where they currently do not pay VAT.

It is worth glancing at the commission's press release (link above), just to get the flavour of the knots in which they are tying themselves, in their attempt to resolve an unresolvable problem.

Therein is the paradigm for the whole of the EU – and the embodiment of the bureaucratic mindset. The "colleagues" cannot admit that their creation is fundamentally flawed and that the best and only sane option is to scrap it and start all over again. Instead, they take an already complex and unwieldy system and make it even more complex and unwieldy, without even of a hope of dealing with the problems they have identified.

This approach is so much of the mindset that we see it in any number of EU activities, and can expect more once the constitutional Lisbon treaty is in place and the commission flexes its muscles again. But, if anyone wants an example of why the EU cannot and will not ever work, all they have to do is look at the way the VAT system works – and the commission's attempts at "reform".

Unfortunately, though, when it comes to unravelling the Gordian knot, it seems we are on our own.

COMMENT THREAD

VAT+fraud[i-VAT+fraud]In the wake of the House of Lords Report on VAT fraud, the House of Commons Public Accounts Committee have just come up with theirs. The "executive summary" is admirably succinct, and I can do no better than reproduce it here:

VAT missing trader fraud is a large scale criminal attack on the EU VAT system. The most serious form—known as Carousel Fraud—involves a series of contrived transactions, within and beyond the EU to create large unpaid VAT liabilities and fraudulent claims.

The Department has been tackling missing trader fraud for over six years, yet has failed to stem the flow of tax losses: the fraud has continued to cost the exchequer at least £1 billion a year. In 2005–06, the level of fraud increased to its highest level yet, with the estimated cash loss to the exchequer of between £2 to £3 billion.

There are no reliable or comprehensive EU wide estimates of the cost of this fraud because most member states have not produced estimates. The EU Commissioner for Taxation has estimated the annual loss from VAT Fraud across the European Union at £40 billion (€60 billion).

The Department has introduced a range of legal and operational measures to tackle the fraud. The fraudsters are, however, resourceful and react quickly to such measures. In February 2006, the Government sought from the European Union authority to apply a special measure—the “reverse charge”—derogating from the Sixth VAT Directive for a wide-range of electronic goods, including those currently associated with the fraud, such as mobile phones and computer chips.

In principle, once in force, this measure would prevent fraudsters from receiving VAT on the sale of mobile telephones and computer chips and would eliminate the opportunity for the fraud. The Council of the European Union approved the derogation on 16 April 2007, but the Council’s decision only allows the Department to apply the “reverse charge” to commerce in mobile phones and computer chips, rather than the wider range of products that the United Kingdom had originally requested. The Government now expects that this narrower measure, combined with other operational interventions, will protect revenue of £50 million in 2007–08.

The reverse charge can only be a provisional measure pending a more comprehensive Euwide solution. The Commission is in favour of VAT being charged on all intra-community transactions in the country of purchase thereby eliminating VAT free operations and the opportunity for the present type of missing trader fraud. The United Kingdom and some other Member States are not in favour of this system. The Department considers that it would open the way for major new frauds.

Individual Member States cannot tackle VAT fraud on their own. The Department recognises that it has to work closely with the tax authorities of other member states and third countries, as well as with the accounting, tax and legal professionals to tackle the problem effectively. Ultimately the European Union will have to agree a new legislative framework for administering VAT, if missing trader fraud is to be eliminated in the long term.

Although the £40 billion a year loss is somewhat less than the Lords' estimate (which went to £170 billion), this is still a huge amount of money – more than our entire defence budget.

However, one notes that the Committee says the EU will have to "agree a new legislative framework for administering VAT" in order to eliminate fraud. Since the chances of that happening are precisely nil, VAT fraud is set to continue, another of those EU scandals which the MSM seems quite incapable of reporting with any degree of emphasis.

What is wrong with people that they cannot take on board the huge scale of this fraud and the eye-watering amounts that are being stolen? If ever there was an open-and-shut indictment of the way the EU works, this is it. But what do we get? A smattering of low-key reports! I really do not understand what is going on here.

COMMENT THREAD

JP+Juncker[i-JP+Juncker]It was at the end of May that we covered a report retailing concerns expressed by the International VAT Association (IVA). They were worried that proposed simplification of EU VAT rules for cross-border trading of services would undermine the battle against fraud, already costing billions of pounds a year.

Well, the one thing about the VAT system is that any changes must be agreed unanimously by all 27 member states. One country alone can block a proposal and, this time, one was enough – nearly the smallest member state in the community, the Duchy of Luxembourg.

This was the outcome of the Ecofin meeting just concluded – conveniently in Luxembourg. To the disgust of EU taxation and customs commissioner Laszlo Kovacs, the country's prime minister, Jean-Claude Juncker (pictured), is refusing an agreement – although this has nothing whatsoever to do with the fraud problem. In fact, it is because Luxembourg is the major beneficiary of the current rules, standing to lose at least €300 million in revenue each year if they change.

By way of background, VAT is the sales tax system which, when it was launched in April 1967, was recommended to members because – in the words of the recital to the First VAT Directive - "…a system of value added tax achieves the highest degree of simplicity…".

Such was that "highest degree of simplicity", however, that it has now been replaced by the VAT Sixth Directive (77/388/EEC). And to ensure it was made even simpler, that Directive since has been further amended by Directives 80/368/EEC, 84/386/EEC, 89/465/EEC, 91/680/EEC, 92/77/EEC, 92/111/EEC, 94/4/EC, 94/5/EC, 94/76/EC, 95/7/EC, 96/42/EC, 98/80/EC, 1999/49/EC, 1999/59/EC, 1999/85/EC, 2000/17/EC, 2000/65/EC, 2001/4/EC, 2001/115/EC, 2002/38/EC, 2002/93/EC, 2003/92/EC, 2004/7/EC, 2004/14/EC, 2004/66/EC, 2005/92/EC, 2006/18/EC, 2006/69/EC and 2006/98/EC.

This list, as you will fully appreciate, omits the accompanying EU Regulations and, of course, the full list of the other simplifying proposals in the pipeline - all to make the VAT system even simpler of course.

However, for the EU commission, mere perfection is never enough. So, intent on giving the system an even higher-than-highest degree of simplicity, on 29 October 2004, it published a proposal for yet another directive amending Directive 77/388/EEC.

This was to provide for "detailed rules for the refund of value added tax ... to taxable persons not established in the territory of the country but established in another Member State."

So simple is this proposition that it scarce needs any explanation but for those who have difficulty keeping up with the crystal clarity of the Commission's thinking, this simply allows for VAT on supplies of services between VAT registered persons ("business to business") to be applied in the purchaser's country rather than in the supplying country. Furthermore, it was also intended to reduce the administrative burden on businesses by harmonising VAT rules currently applicable to services supplied to businesses and private individuals.

The proposal has special application to electronic services, like internet, telecommunications systems, satellite and media services where cross-border trading is the norm. But it was also one fraught with danger, making it easier for criminals to milk the system.

As it happens, though, Luxembourg – at 15 percent - has kept its service tax at one of the lowest levels in the EU, well below neighbouring Germany, which recently raised its to 19 percent. This has been a deliberate ploy to attract lucrative service businesses. The tax advantages have attracted iTunes, Skype, eBay, Amazon.com, AOL and other big internet companies to set up shop in the Dutchy. The government is not anxious to see them go.

Thus, even when the ultra communautaire Luxembourg is involved, national interest will always prevail. "We have not made ourselves extremely popular in Europe," says prime minister Juncker, but he then adds: "Here, an essential interest of Luxembourg was at stake and therefore today I had no other possibility than to say no."

Kovacs is now looking to an end of year deadline to reach a compromise with Luxembourg, adding that he was optimistic that it would be done. Optimistic he might be but there is big money at stake – and money talks.

COMMENT THREAD

GTR+02[i-GTR+02]We could predict what was going to dominate the UK newspapers by early evening yesterday and, sure enough, there is saturation coverage of the kidnap of five Britons in Baghdad and even more (in some papers) on the resignation of Graham Brady after the Boy King's extraordinarily maladroit handing of the grammar school issue.

But the penalty of the newspapers devoting so much space to specific issues is that much of the rest of the news – much of it of crucial long-term importance – is driven out, never to be covered.

One casualty of this phenomenon is the latest development in the long-running VAT fraud saga, a complex issue which the media needs no excuse to ignore. This we saw the last time there was a development.

At least, though, The Financial Times offers a report, retailing a warning from the International VAT Association (IVA) that proposed simplification of VAT rules for cross-border trading of services will undermine the battle against fraud, already costing billions of pounds a year.

Worryingly, as national authorities are cracking down on the more well-known scams – mainly involving computer chips and mobile telephones – the is reporting that (as expected) criminal are becoming more sophisticated. They are increasingly targeting services and also using a series of inter-connected transactions in which the sales of services mask the fraud.

GTR+01[i-GTR+01]What makes this issue so grave is the sheer scale of the fraud and the fact that the system is inherently vulnerable to such fraud. As fast as the authorities plug one loophole, the criminals find another.

Furthermore, this is real money being stolen – not some victimless accountancy scam - and many of the perpetrators are believed also to be involved in either the illegal drugs trade or terrorism (or both).

Yet, our increasingly juvenile media does not seem to be able to cope with the enormity of this criminal activity which, as we pointed out in our last piece, dwarfs such celebrated crimes as the Great Train Robbery. As for our politicians … well, the Boy doesn't do "Europe".

COMMENT THREAD

Money[i-Money]VAT fraud cost the UK Treasury £4.75bn in 2005-06 and is estimated to be worth €250bn (£170bn) annually across the EU as a whole, says a House of Lords Committee Report. These are such staggering figures that they defy human comprehension.

Those who are old enough, however, will remember the Great Train Robbery - committed on 8 August 1963. A cool £2.3 million was stolen - £40 million in today's money – and the publicity was huge, reaching down even to the present, where the crime is part of our national folklore.

By comparison, just the UK losses to VAT fraud in 2005-6 amounted to the equivalent of 120 great train robberies, or one every three days. You have to say it again, for the enormity to sink in: VAT fraud was equivalent a great train robbery every three days. At a European level, that number soars to a colossal 11 per day.

For sure, more recently, the UK government has got to grips with some of the more obvious scams – involving computer chips and mobile telephones – through increased enforcement and tightening procedures. And it has done deals with the EU to change the part of the system applicable to chips and telephones – which we covered here and here.

But the House of Lords argues that these measures are unsustainable. Simply carrying out the checks involves about 1,500 staff, at a cost of £95m a year, with some supply chains under scrutiny involving up to 600 companies. And it carries the danger of withholding money from legitimate, smaller, importers and traders, possibly pushing some to the brink of bankruptcy.

Furthermore, the peers warn that the system change will simply shift the fraud from goods like mobile phones to others instead - such as cosmetics, precious metals, and computer software. Thus the fraud "will continue to migrate and mutate."

The only way we can get to grips with this fraud, therefore, is to change the VAT system and that – as even the Committee acknowledges – is not going to happen. It is an EU tax, it requires unanimity to change, and the majority of member states are against any fundamental changes.

So, we must continue to suffer the depredations of (largely) organised criminals, who will continue to rip off taxpayers (us) to the tune of billions each year. And because, politically, there is absolutely nothing we can do about it, the media will note it as a curiosity (those that bother to report it) and go back to sleep while, from the Opposition, we will hear nothing.

That is the level to which we have been driven by our membership of the EU. Neutralised and emasculated, we can only tut-tut and shake our heads in dismay. It is truly bizarre.

COMMENT THREAD

gordonbrown[i-gordonbrown]Remember that rebate?

Even when it was agreed, way back, Gordon with his Treasury hat on was niggling about the details, a sum of about £90 million which he reckoned should come off the annual £1 billion which Tony had given away.

This is because the deal also included lump-sum refunds to four other countries which pay considerably more into the EU budget than they get out - Austria, Germany, the Netherlands and Sweden.

Gordon argued that the UK should get a rebate on its contributions to those refunds, as well as to the rest of the EU budget, and there has been a dispute ever since last June as to whether he should get the money

Anyhow, according to the BBC website, the EU still believes in “give and take” – we give and it takes. Gordon has given up the claim and the money will be paid into the EU coffers.

With the sudden cave-in, dark rumours are circulating that the promise to pay was in some way linked to a French agreement to VAT changes to reduce fraud, the so-called reverse charge scheme. The rumours have been vehemently denied by EU officials, which means they are almost certainly true – that is certainly the view of the Treasury.

So there it goes – in order to implement much-needed changes to the EU’s VAT system to aid the battle against fraud which since 1990 is estimated to have cost the Exchequer at least £20bn, we have to hand over another £90 million a year. The ridiculous thing is that the VAT changes were all supposed to have been agreed in December last.

Nevertheless, aren't we lucky we belong to this magnificent organisation. If they didn't keep taking all this money off us, we might be tempted to spend it on defence - and that would never do.

COMMENT THREAD

Groundhog%20Day[i-Groundhog%20Day]As I recall, the plot of Groundhog Day is that the hero, played in the film by Bill Murray, had to replay the day, over and over again, until he got it right. There is no such relief for this blog, however. It doesn't matter how right we get it, we are doomed forever to revisit the same stories.

One of these is that hardy perennial, Value Added Tax and its inescapable accompaniment, fraud. In that context, it really is quite amazing that there should ever be a story here. Never in the field of human taxation has any money gathering device been so open to criminal raids, so much so that any halfway intelligent crook would be mad to steal from a bank. Creaming money from government coffers is so much easier and profitable.

Yet, because it is an EU tax – devised by French bureaucrats – there is no easy way of getting rid of it. Ever heard that one before?

When we left it last time, in July, in a piece called "money down the drain", Britain had been seeking to change the rules to allow what was called a "reverse-charge" system of VAT on computer chips and mobile phones.

This was to fight the so-called "missing-trader fraud", where large quantities of high-value imported goods (free of VAT) are sold on with VAT To British traders, only for the trader to disappear with the proceeds. This, we are told, cost the UK exchequer £2bn-£3bn in 2005-2006 (although it could be a lot more).

The reverse-charge system means that the VAT is payable only by the final customer - making it closer to the old-fashioned purchase tax. And while this would have ended the missing trader fraud, it was blocked – you guessed it – by France.

Now, it seems - after six months more losses - France has been looking at its own accounts and, lo and behold, officials have found that the French system is also rather "leaky". They have lost anything between £200m and £1.3bn this year alone. And, now that French interests are directly affected, France is suddenly interested in a change of the rules.

However, Germany wants to introduce the system across the board, which the French think would open up new opportunities for fraud. So the French are planning to block any German moves to get this scheme adopted, calling in aid British help. In effect, they demanding a quid pro quo - a reward for supporting the British in getting a targeted reverse-charge scheme which the French now also need to stop their own fraud. With me so far?

Germany on the other hand, together with Austria – two countries which are losing mega billions on VAT fraud – are therefore now considering a retaliation. They are saying they will block the now Anglo-French scheme.

Meanwhile, Laszlo Kovacs, the EU tax commissioner, is warning of a "chaotic situation" if different countries apply different rules, and is demanding that member states work together more closely to fight cross-border crime. And, sometime soon, the finance ministers of the EU member states are going to meet to sort this out...

If only this was a film. At least then it would come to an end and we could all go home.

COMMENT THREAD

Mobiles - a gift for VAT fraudsters[i-Mobiles - a gift for VAT fraudsters]A few days ago, we picked up a story about VAT fraud, in which we reported that it was costing the British taxpayer some €3 billion a year (just over £2 billion).

That is not just a figure, but real money taken out of the system which then has to be made up from other taxes – or borrowing – so we are talking about a serious problem.

However, an article in The Independent on Sunday this weekend suggests that the problem is much, much more serious than that, citing figures from the Office for National Statistics and Customs. This organisation says that fraud-related trade grew from £1bn in the first quarter of 2005 to £7.4bn between January and March this year. Such is the epidemic of fraud that revenue losses for 2006 could be as high as £10bn.

Now, given that scale of fraud, you would think that the government would be moving heaven and earth to reform the system which allowed it to happen – but not a bit of it. VAT is an EU tax and any changes to the system require the approval of the commission, which – as we reported in our previous piece (link above) is mulling over changes.

Thus, for want of being able to take direct action to stem the fraud, the British government is left trimming at the edges, in the hope it will have some impact. But its latest stratagem, it appears, is causing serious grief to bona fide traders who deal in mobile phones – the commodity at the centre of many scams.

The problem is that up to 1,000 traders in the mobile phone and computer-chip industries have been told individually that their VAT repayments are under "extended review". Normally, repayments are made within 30 days of a claim, but Customs is currently withholding refunds for three months or more and such is the burden on cash flow that traders are warning Revenue & Customs that they risk driving firms out of business.

Earlier this month the Federation of Technological Industries held an emergency meeting attended by around 400 members, where it was revealed that traders were now owed millions of pounds in VAT repayments.

It is not until October that the new, so-called “reverse-charge” system for VAT in the computer-chip and mobile phone markets comes into force, where VAT will be chargeable only at the point of final sale, removing VAT cash as a factor in transactions, and thus wiping out the fraud potential.

By then, of course, rogue traders will be moving on to other commodities and the whole cycle will start over, bleeding money from the legitimate economy, some of it into organised crime and some – or so we are told – to funding terrorism.

It seems absolutely inconceivable that any government would tolerate this state of affairs, but such is the grip that the EU has on the affairs of our nation, that the issue gets down-page coverage in the business section of the Independent. Thus do we lose shed loads of money and it isn’t even treated seriously by the media.

And where, might one ask, are the Boy King's not-the-Conservative Party and all those serious political bloggers ?

COMMENT THREAD

water_drain.jpeg[i-water_drain.jpeg]Incredibly, or so it seems, it was in May when we last wrote about VAT and the member states attempts to block the haemorrhage of money lost from a system that its inherently prone to fraud.

At that time, Germany – with annual losses in the order of €17bn-€18bn – and Austria were up front in suggesting a revised system in an attempt to cut the fraud. This was the so-called "reverse charge" system, where VAT was paid only at the point of final retail sale, with no payments made by intermediates, and therefore no refunds.

However, such simple logic is not for the EU commission. The idea was vetoed yesterday by Laszlo Kovacs, the EU tax commissioner who said that the proposal could not be allowed.

Said Kovacs, derogations from the normal VAT rules could only be allowed if they were "targeted, restricted and proportionate". He said the Austrian and German plan could only be approved if there was a change of EU VAT law.

Magnanimously, however, he is prepared to accept reverse charging in targeted cases, such as the British to apply it to mobile phones and computer chips. So-called "missing traders" have chosen these high-value, low-volume goods as their preferred target for fraud, which occurs when goods are imported VAT-free from another European country. This type of fraud is estimated to cost the UK Treasury up to €3bn a year.

Nevertheless, member states will be meeting in the autumn to consider whether to change the tax law, but even then the commission is likely to continue with its resistance to the German scheme. Kovacs wants a method where tax is paid only in the country of origin: that country then passes a share of the VAT receipts on to the country that receives the goods, rather than refunding it to the exporter, only for it to be reapplied in the country of sale.

Whatever is agreed, though, more than six months will have passed before ministers of the member states finally get down to talking seriously about reforms. In the meantime, money will have been pouring down the drain. And even then, without the commission's agreement, nothing can happen as it has the sole right to propose new or amend Community law.

What is wrong with us all that we should continue to tolerate such madness?

COMMENT THREAD

A modern container port - a conduit not only for goods but also massive fraud[i-A modern container port - a conduit not only for goods but also massive fraud]Slagging off the MSM is certainly a favourite sport of bloggers, and one to which we are particularly partial, although taken it excess it can be tedious and counter-productive. After all, as we observed recently, the MSM does have its role and the relationship between blogs and the general media – at its best – is largely synergistic.

That said, one of the particularly irritating characteristics of the MSM is its arrogance in assuming that, because it has just noticed a story, that makes it "news". The usually unspoken (but sometimes articulated) corollary is that mere blogs simply recycle the news supplied by the MSM

Thus is it that The Sunday Telegraph today reports that criminal gangs are "cheating the taxman out of VAT on £1 in every £7 of Britain's trade with Europe".

The full extent of the growth in so-called carousel fraud, says the newspaper is laid bare for the first time in trade figures quietly released by the Office of National Statistics last week. They show that it is almost five times greater than it was a year ago and now involves as much as 14 per cent of all Britain's imports and exports with the EU.

Errrr…. Not exactly. On this blog on 10 August 2005 we reported precisely the figure of £1 billion loss, adding that, "this the first time fraud on this scale has been detected, and, since 1990, VAT fraud is estimated to have cost the Exchequer at least £20bn - another cost attributable to our membership of the EU."

We returned to the issue again on 13 January of this year with a report headed, somewhat presciently, "Head in the sand", remarking how the news of this growing scandal had passed without a ripple in the media.

Nevertheless, The Telegraph does add some new figures, stating that, if the losses continue escalating at the current rate, the figure would rise to more than £4.6 billion - enough to pay off the National Health Service deficit of £1.27 billion three times over.

The piece concludes, however, with a comment from Mike Warburton, a senior tax partner at Grant Thornton, the business advisers, who says: "Government attempts to crackdown on this type of fraud seem to be having no effect whatsoever."

And there the story is left hanging. In a grown-up newspaper, the implications of this stark comment might actually have been the core of the story, pointing up the situation that we had reported in both of our stories, that VAT is so complex and structurally flawed that it is wide open to fraud. Furthermore, no sooner do the authorities attempt to plug one loophole, then another is found.

Thus, the only rational conclusion that one can draw from this situation is that VAT should be abolished, and replaced with a local sales tax or some other measure which is less prone to fraud.

But, of course, VAT is an EU tax and we are not free agents, so there is absolutely nothing we can do about this haemorrhage of money, without addressing the EU issue. And since the government is not prepared to do that, and the Boy King doesn't "do" Europe, this is left unsaid. We are left with a "curiosity" story with no political dimension and no pointers towards a resolution.

Such are the glories of the MSM.

COMMENT THREAD

VAT%20fraud[i-VAT%20fraud]While it can be said with some confidence that no tax will ever be truly popular, it can also be said with equal confidence that the single most detested tax in the business community is Value Added Tax, or VAT.

But, not only should the business community have cause to resent this tax, everyone in the European Union should hold similar views for the very complexity that makes it so unpopular with business also makes it a thieves' paradise. And we are not taking about peanuts. VAT fraud accounts for estimated losses of at least €60 billion a year – or ten percent of all transactions – representing real losses which have to be made up through other taxes. Furthermore, this is money which helps finance organised crime and terrorism.

So huge is the scale of the fraud that it has even percolated into the corporate brain of the commission. Thus, next week, Laszlo Kovacs, the EU tax commissioner, is set to propose a series of options to the member state finance ministers in an attempt to remedy the situation.

Were this not an EU-devised tax, most if not all of the member states would have ditched it years ago, because of the fatal flaws in the system that make it so prone to fraud. But, national governments, of course, have no powers to abolish EU laws and the commission – which is the only institution which can set such a process rolling, is not about to scrap this tax.

Instead, Kovacs is propose that the tax is no longer refunded to suppliers when their products or services cross borders – through which means most fraud occurs. He wants refunds on cross-border goods and services to be passed directly between governments.

Needless to say, this will require con-ordination by the commission, to set up the cross-border payment system, thereby adding to its powers. It would also lead to increased pressure for harmonisation of VAT rates, as different national rates would be extremely difficult to administer. Thus Britain, Germany and Austria are suggesting the use of a "reverse charge" system, where VAT is paid only by the supplier at the end of the chain.

That is to be included as one of Kovacs' options, as is increased co-operation between national tax authorities, but the commission's preference is for the abolition of direct, cross border refunds.

Any changes, though, will have to be agreed by unanimity. But, since the last fundamental change to the VAT regime was in 1977, with the VAT Sixth Directive, and member states have failed ever since to agree any substantive reforms, the chances of securing change this time round are not good.

Thus, while the commission and the member states bicker and manoeuvre, the criminal fraternity will continue to enjoy its bonanza while the "citizens" of Europe will have to keep paying the bill. Such are the joys of membership of the European Union.

COMMENT THREAD