The government is seeking to change the way the business supply chain charges for VAT, partly in response to fraud in the IT components industry.
The UK government has applied to opt out of Europe-wide laws governing VAT charges. It wants only consumers to pay for VAT on retail products and services, instead of seeing every trader in the supply chain having to put VAT on their stage of production.
The move is designed to prevent so-called “carousel fraud”, where traders charge VAT on goods and services, and then don’t pass it back to the government.
This is expensive for governments as VAT-registered buyers will claim the VAT back from the government.
Such fraud is believed to be widespread, and is particularly difficult to counter when a firms sells products to another European country, and adds VAT which it has no intention of passing to its national government.
Her Majesty’s Revenue and Customs (HMRC) estimates that tax collection losses arising from carousel fraud were up to £1.90bn for tax year 2004-05.
The UK government has put in a request to change the VAT collection law after the European Court of Justice recently ruled that three companies, which included two computer processor resellers, were entitled to be reimbursed for their paid VAT.
The UK VAT and Duties Tribunal had ruled that they couldn’t claim the VAT back, as the VAT charged on the goods may have been used in a carousel fraud.
One of the processor companies has already gone into receivership as a result of not receiving a VAT refund of over £13m it was owed by the government.