Carousel Fraud

University essay from Lunds universitet/Juridiska institutionen

Abstract: Since the abolition of fiscal frontiers in the EU in 1993, intra-Community supplies of goods between taxable persons are exempt from Value Added Tax (henceforth VAT) in the Member State of origin. Instead, the goods are taxed in the Member State of destination at the rate and condition in force in that Member State. This transitional VAT system manages to maintain the diverse fiscal systems in the EU. However, the zero-rating of intra-Community supplies of goods combined with the system of deferred payments for collection of VAT on intra-Community acquisitions of goods exposes the VAT system to carousel fraud. Carousel fraud consists of contrived circular chains of transactions most commonly involving small, high value goods that are easy to transport such as mobile telephones and computer chips. There are many variations on the series of transactions possible in a carousel fraud. The problem for the tax authorities however fundamentally remains the same: large unpaid VAT liabilities and corresponding VAT repayment claims. In an attempt to stop the defrauding of their national revenue, Her Majesty's Revenue &&semic Customs (henceforth HMRC) in 2000 introduced its strategy using civil methods in the battle against carousel fraud. Since then HMRC have among other measures, introduced extended verifications, joint and several liability and reverse charge mechanism on intra-UK sales of mobile telephones and computer chips, where the assignment exceeds the value of £5000. The strategy used by HMRC in their battle against carousel fraud has resulted in a drop in the fraud. However, apart from the burden put on legitimate traders, the losses arising from carousel fraud are still significant. The act of a Member State alone is not enough to fight the fraud efficiently. Carousel fraud is a Community problem and needs therefore to be dealt with at Community level. The search for solutions has taken two approaches&semic one concerns administrative changes within the framework of the existing VAT system, and the other a change of the structure of the VAT system itself. The introduction of a flat rate origin VAT system, where intra-Community exports are subject to VAT in the country of origin at a flat rate of 15 %, would effectively reduce the scope for carousel fraud. However, such a structural change requires the unanimous approval of all 27 Member States. In the absence of political consensus on the matter and as the defrauding of the Member States' national revenues continue, there is need for administrative changes within the framework of the existing VAT system. To fight the fraud efficiently, the instruments and the legal framework in the field of administrative cooperation between Member States must be reinforced, improved and complemented. Furthermore, the Member States must coordinate the different measures introduced at national level.

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