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International VAT Association Minutes of Technical Conference Held 27/28th April 2006 Dublin, Ireland
Council Members Present:
Jean-Claude Bouchard, President Stephen Dale, Deputy Chairman Pamela Beighton, Secretary/Treasurer Richard Yewdall, Legal Peter Vybiral Gilles d’Huiteau Martyn Redman
THURSDAY 27TH APRIL, 2006
Presidents Welcome – Jean Claude Bouchard
Jean-Claude Bouchard welcomed everyone to the meeting. He introduced all of the speakers for the conference. He highlighted particular areas of concern relating to carousel fraud and both fictitious delivery of goods and fictitious services.
Sales Tax Fraud in Europe – Jeremy Woolfe, Freelance Journalist (This should be read in conjunction with the presentation slides)
Ladies and Gentlemen: Stephen Dale kindly asked me to describe to you the present situation on VAT fraud - or, rather, he emphasized the need to describe the perception. You will realise that I am coming from the position of a journalist, which is quite different from being an expert.
Journalists - including me - need only a reasonable overview of a subject. With that, what we do is to research. This often means simply picking the brains of the real experts.
Then we endeavor to express what we are told, and what we read. So, here I present, the perception. Mainly, it goes back to the conference “FEE round-table, VAT 50 years young”, organised by the European Federation of Accountants (FEE). The meeting, the initiative of which appears to have come from the profession, took place in Brussels on 13 May, 20, 2004
So, let’s get our perception from what the press reported. For instance, an article in the Independent on Sunday, the British broadsheet. A straight report, it sets out the estimated loss (€100 bn/yr for the EU 15), talks about jeopardizing legitimate traders and gives a description of carousel fraud.
A little reminder: carousel also means merry go round. In our case, not very merry at all! Just for the record, missing trader fraud, which is also known as carousel fraud, involves a fraudster importing VAT-free supplies of small, high-value items which are sold to another trader at a price that ostensibly includes VAT. The fraudster then disappears without paying the VAT over to Customs and Excise. There are variations. By removing the VAT charges in the supply chain until it reaches the purchaser, the government can be confident it will not have to make unjustified repayments of VAT.
American accountants would seem to be interested in Europe’s problems if an article in Accounting Today is anything to go by. The subject matter is similar to, but longer than the version in the Independence on Sunday. In some cases fraud taking up to 10 per cent of the annual take is the line, the US readers learn. There was similar text in a Scottish business monthly, a glossy magazine. By mid 2004 there should have been plenty of awareness.
One can also refer to the Commission’s staff working document on VAT collection and control procedures, of 10 January 2005. It noted that the Commission expressed disquiet at the unacceptable level of VAT fraud and this concern was echoed by the ECOFIN Council meeting on 5th June 2000. This is a lengthy, 45 page document, that pours scorn on how the EU member States manage their relevant procedures. For instance, it states, on the subject of statistics, that four of them could not even give the number of control visits carried out. It commented: “All of this, of course, hampers the interpretation of data received from the Member States.
Following the FEE conference, measures to combat the losses tended to disappear behind the scenes. For instance, little was publicly heard about a conference held in Malta, in the summer of 2004. I personally learned about it only by chance. I was trying to phone Stephen Bill, in the Commission. Sorry, his secretary told me. He is at the Malta conference.
Further inquiries revealed that that meeting brought together tax officials from all EU countries, including new Member States. The idea was to improve cross-border co-operation, as a means to combating the scandal. Sadly, the problem does not seem to have gone away. In fact, it seems to be more than a bit of a nightmare. We learn the details from two revealing news reports in the Financial Times.
On Jan 27, 2006 Vanessa Houlder wrote under the title Radical overhaul of VAT system proposed. She said that the (British) government was is seeking to make a radical change to the value added tax system in an effort to eradicate the fraud. It had asked the European Commission for permission to remove VAT charges from the supply chain of certain goods such as mobile phones and computer chips. Ministers believed, she wrote, that this would deprive criminals opportunity.
The decision by the British government was prompted by fears that fraudsters were gaining the upper hand. It had said recently the fraud, which cost between £1.12bn and £1.90bn for 2004-05, had increased in recent months. Dawn Primarolo, paymaster general, said the step was "one of many measures designed to thwart [it]". She said the government would work closely with the business community to minimise the impact of the proposals on legitimate traders.
The proposed changes to the VAT system marked a U-turn for the government, which had rejected recommendations along these lines by tax advisers, such as the Institute of Chartered Accountants in England and Wales. They had argued, wrote Houlder, that removing VAT charges from the supply chain until the final retail chain would be fairer and more appropriate than the controversial tactic employed by the government of denying VAT refunds to other businesses in the supply chain. Earlier this month, the European Court of Justice said the government's approach was illegal.
Some advisers criticised the government for taking so long to make these changes, described as introducing a "reverse charge procedure". Graham Gunning of Ernst & Young, the professional services group, said: "Customs should have implemented this over 2½ years ago."
In 2003, tax officials had told the House of Lords economic committee there were compelling arguments against adopting a "reverse charge" system. That House believed it was unjustified to apply it to internal trade and it feared fraud would be "pushed to the far end of the chain". It was also reluctant to seek a derogation from the Commission.
A little later, on 13 Feb 13, Vanessa Houlder, wrote again, under the title Tax experts angry at role in fight on fraud. Tax experts were angry, Houlder reported, at being drawn into the government's fight against avoidance and fraud through the launch of a specialist tax advisers' unit within Revenue & Customs. The Revenue wanted to explore ways to increase its influence over advisers, as well as harnessing their expertise to improve the running and policing of the tax system. But the move was being resisted by some advisers who argue that over-complex legislation, rather than bad tax advice, was to blame for lost government revenues. They feared they were are being pressured into falling in line with the government's view that much tax planning was unacceptable, even if within the law.
Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants, was quoted: "They are putting another burden on professionals in an effort to get people to sign up to the way they perceive the world."
The Inland Revenue had considered imposing penalties on advisers promoting abusive plans, taking a lead from other countries, including the US, Canada and New Zealand, continued Vanessa Houlder. It had also looked at the workings of the US Office of Professional Responsibility, which regulates professionals and imposes sanctions on errant advisers. The Revenue said: "Tax advisers play a central role in making the tax system work. We want to give them a bigger opportunity than they've had in the past to carry out that role. "We think there is more that advisers can do to help improve the operation of the tax system - to promote filing, to work with us on beating missing trader intra-community [value added tax] fraud and we need tax advisers to tell us about their experiences of the tax system and we need to tell them when we have concerns."
John Whiting, of the Chartered Institute of Taxation, was reported to have reacted: "We would be a little wary of suddenly appearing as agents of the Revenue. I can understand why the government might be looking at it [greater regulation of tax advisers], but is this trying to control a real problem? If the problem is bad tax advice, then there is a case for regulation. If the problem is that the government is losing money because people are finding a way around the tax system, we need clearer rules."
Advisers have played a role in the government's avoidance clampdown with the introduction of a disclosure regime in 2004 that forced them to give officials warning of new tax schemes.
The following overview, researched after the FT articles, appeared in the current issue of Accounting & Business, from the stable of the Association of Chartered Certified Accountants. What it comes down to is that solutions are being sought to the EU’s high fraud on sales tax. But they seem to be elusive.
In fact, Europe’s entire VAT regime is potentially being thrown into the balance. Either way, the extent of the cheating is now, regrettably, stimulating different palliatives from various EU member nations, including France, Austria, the UK, and many others.
Since May 2004, there have been few publicised strategies taken by the public authorities to stem the criminality. A slight exception was a proposed amendment to the EU’s Sixth Directive on VAT, to speed up measures to rationalise and simplify national derogations from the Directive.
The amendment is not expected to get to the plenary hearing in the European Parliament before the summer, and then would require enactment by national governments.
Current, emergency measures, by France exemplify today’s high level of concern. In December 2005, the nation adopted legislation, under article 94 in its Loi de Finances rectificative de 2005. This legislation will ban any "non-established" company from charging VAT in France to VAT registered countries. “Non-established” means any business that has no fixed or permanent business establishment in France.
It applied, legitimately under EU regulations, by using a provision under article 21.1 a) of the relevant 6th Directive. This does allow member states to appoint the customer of a transaction as being the person liable for the VAT due by a non-residential supplier. The French law is due to come into effect from 1 September.
Austria is also typical, in that it has asked the European Commission for a general derogation, that is, applying to all goods, from the 6th Directive. It is seeking to apply a “reverse charge” mechanism to any transaction over €10 000.
Under this mechanism the customer has to account for the VAT due by the supplier, which the former then recovers. Under the Austrian plan, transactions worth under €10 000 would be subject to the normal rules. In March, as far as I know, the Commission had apparently still to reply to their requests.
Altogether, EU members have been allowed 140 derogations
However, according to Stephen Dale, FEE’s chairman of the indirect taxation working party, reverse charge mechanisms could lead to other, serious, fraud problems. Removal of the control system that VAT paperwork applies could result in an increase in cheating on corporation tax, and even personal income tax, he explained. Stephen has told me that if you start de-taxing any transaction in the chain of VAT liable transactions, this effectively allows tax-free goods to enter your home market.”
A like-minded cold-shouldering of “derogation” attempts come from Chas Roy-Chowdhury. According to Chas, All that would happen is that derogation will move the fraud to elsewhere.
The fundamental fault in the VAT system should have been cured in the 1990s, he has stated. Then, the whole of the EU system should have been set up as if there were just one country. A single system would have eliminated the opportunities for fraud. However, it would have required a clearing bank set up to re-allocate VAT receipts equitably between the member states. In the cases of net exporters, such as Germany, funds from the bank would need to be allocated back to the exporter. Regrettably, explained Chas, that idea died from lack of trust. EU member nations did not and do not, have sufficient confidence in each other enough in fair dealings to make such a system feasible.
This lack of cross-border trust is the more understandable when the Commission had to report on statistics for VAT that:- “Four Member States could not even give the number of control visits carried out. Most others had partial but not complete data.” In any case, some EU member nations are reluctant to give up sovereignty over taxation matters. Another barrier to a single, unified system, explained Chas, would be that all VAT rates would have to be harmonized. Zero rating, a popular political palliative such as for instance on children’s clothes in the UK, could not longer be acceptable.
One should record the sectors that were most exposed to fraud as: - construction, hotel and catering, transport, services to final consumption, all sectors involved in so-called carousel fraud (mobile telephones, computers and computer components), cars, mineral oils, electronic components, precious metals, textiles and others. (There was no explanation provided for these sectors other than the black market economy)
Only now, it appears, are more determined efforts being made to attain more certain assessments of the rate of loss. Following initiative from the European Parliament, the Commission’s budget section has ordered an external report to quantify missing trader fraud. That report is due at the end of March (Donato Raponi commented that this report had been received but not yet published, but that there was inconsequential content therein) In parallel, the Commission’s tax section was is to arrange for a more detailed project, to evaluate all types of VAT fraud. No doubt we shall hear more on that later at this conference.
Incentives for VAT fraud are high, because of the high and growing rates in the European Union. The UK, at 17.5 per cent, is comparatively low. Luxembourg, at 15 and Spain, at 16 are also low. Germans will see an increase, from 16 to 19, in 2007.
Danish retail customers pay out at 25 per cent more on the nominal value of what they are buying. Most rates are going up, to around 20. In comparison, in the US, federal sales tax is set at 2-3 per cent. State tax rarely brings the total to over 6-7 per cent.
Therein lies the problem. Last week the European Court of Auditors reported vast waste on the EU TACIS programme for support to Eastern Europe. Only a third of projects in the Russian Federation got the clear from the auditors. There have been reports of wasteful spending of taxpayers’ hard earned money in the EU’s Phare programme, the agricultural spend, and on the Regional Spend. The Committee of the Regions has upped it’s spend to €500 million per year – for what? These are Brussels spends. Who would think that national governments were free of flagrant waste as well. Obviously measures are needed to tackle the sales tax problem immediately – not immediately – last year – the year before. But radical approaches to the whole governance systems of taxation and financial controls should not be forgotten.
In summary, what we seem to have, is: historically, complacency from officialdom, emerging crisis having been ignored, now Member Sates breaking ranks, officialdom attempting to pressurize the profession to solve the problems, other half-baked measure ridiculously high taxation rates
The solution, pretty obvious to me as an outsider, would seem to be to get the European Parliament (or Council - impossible!) call in a high level report. Something on the lines of the Sapir report on EU economics … which got such a scorning from the EU institutions.
So, in summary, here are suggestions for what is needed: select a high level committee to plan new governance system; reduce excessive taxation rates; make up for reduced revue by eliminating wasteful government expenditure.
If those solutions are not thought to be “practical”, then we need a bit of magic! In Serge Danot’s Magic Roundabout TV creation, for children around five or six years old, there is a character somewhat like the genie that comes out of the bottle. His name, Zebedee - Unfortunately we seem to have got into the absurd position where nothing less than a kind of European financial Zebedee could solve the situation. In any case, it is not for the accountancy profession to put right fundamental flaws in governance systems. That is what governments themselves are supposed to do.
Thank you for your attention - what do we say now?
IVA Admin & Housekeeping – Pamela Beighton
Pam advised the membership figures from 2005 had been 68 member companies. Although we had lost 2 members as their business interests had changed we had received 8 new member applications. Pam welcomed the new members attending their first conference. Pam highlighted that the new member applications had been from countries which already have representative members. It was noted that we seem to be failing to attract members from the new EU member states. Any member having contact with Agents from these countries was encouraged to provide them with details of the Association. Only by attracting members from these states can we provide full coverage of the EU through practical experience.
Pam advised that the Council had discussed contacting other professional groups with regard to a possible collaboration or attracting new members.
The question was raised as to whether it was thought appropriate to invite VAT specialists (i.e. VAT Managers/Directors) from the commercial sector generally to attend as members. Initially a show of hands indicated that the membership was not keen to adopt this approach. The aim in supplementing our membership by asking other Vat specialists was to broaden the knowledge of members – in particular by understanding the needs and difficulties of the commercial sector. It would also add weight in some cases to matters put to the Commission or Tax Authorities. Concern was expressed that it would be dilute focus from the common objective of the membership, all of whom run businesses as VAT practitioners. It was suggested that to begin with it would be beneficial to invite some speakers – possibly from particular industries, e.g. pharmaceutical or communication. This view was adopted and it was requested that names be given
Pam then discussed the Questionnaire which was issued to all members with the conference invitation. It was noted that the Council try to ensure the Association represents the interests of its membership. There was a very disappointing response to the questionnaire and this makes it increasingly difficult to fully comprehend the member’s views. Anyone who has not read/responded to the questionnaire was requested to do so. Otherwise we may draw the conclusion that you are satisfies with the manner the present Council is structuring our activities and that you accept we are evolving in the right direction. (Please see the slides for a summary of questions & responses).
One point that did come out was that the few people who had replied represented a majority in terms of putting the conference back to its original format. Pam suggested that we reserve judgement on this issue until the end of this conference when delegates had experienced both formats and could better comment. All Agreed!
Nominations were put forward for members to stand for election for a new Council. It was noted that Jean-Claude Bouchard had agreed to a final year as Chairman/President so that a successor could be found. He stated that his view was that to date the Association had been very successful and always succeeded in getting an EU representative and usually a tax authority representative to attend.
Pam had another year to continue acting as Secretary. Nominations therefore were received from Stephen Dale, Richard Yewdall, Gilles d’Huiteau, Francois Mary, Martyn Redman, Ryan Ostilly, Leif Plener and Hilde Blontrock. At this time there were positions available for 5 members to be selected. Each nominee made a brief speech as to their background and experience.
Jean-Claude Bouchard asked the delegation whether we should accept all nominees to the Council as the Association had been re-constituted and the number of member companies had grown significantly since inception. The delegation voted in favour.
Website Development. Many of our members have noted that there is a need to develop our website further, particularly with regard to specific countries. Pam stated that the only way this will happen is when the members agree to share some of their knowledge and that this had been requested for the last three meetings. WE HAVE ONLY 7 MEMBER STATES COVERED OUT OF A POSSIBLE 25 AND AGAIN REQUESTED VOLUNTEERS! Pam advised that any information provided to her can be published on the website quite easily. (Two delegates came forward after the meeting and agreed they would assist in providing information.) We have incorporated many of the other changes requested including links to other sites.
Jean-Claude closed the meeting for Thursday afternoon and invited delegates to attend the cocktail evening arranged for 8pm. FRIDAY 28TH APRIL, 2006
Jean-Claude opened this meeting, introducing all of the guest speakers for the day.
Revenue Commissioners, Republic of Ireland – Michael Clancy
Michael Clancy from the Revenue Commissioners kindly attended the conference to give an overview of the VAT Unregistered Payments section in Ennis. He advised that not only did the department make 8th and 13th Directive refunds, but also handled a number of domestic orders for refund as well. The various repayment types include Farmers, Disabled, European Commission, donated medical equipment and in total there are 13 types of repayment handled by that office.
Michael noted that they do not presently differentiate between 8th and 13th Directive claims, but went on to note some statistics for us.
In 2005, €103 million was refunded to approximately 35,000 applicants. €59 million of this was made to approx 15,230 applicants filing 8th/13th Directive claims and the remainder to other payment types.
Under the 8th Directive, 80% of claims received relate to the haulage industry, particularly road fuel and they expect these figures to rise in 2006. Most hauliers don’t use an agent and this is explained by the tight margins within that industry.
The 8th Directive also covers the cross border trade sector and is subject to a high risk of fraud. The office in Ennis will look for a supplier ID and transaction reference, establish the claimant. They like to have sight of the vehicles and make regular use of the mutual assistance. This is mainly with UK claimants. Food, drink and accommodation are not refunded and this is an effort to reduce the risk of fraud.
Michael advised on the process within their office. All claims are registered on arrival at Ennis, so an officer can always advise on whether they have received the claim. They are then examined for validation. If circumstances are unclear at this time, officers can request additional information, etc.
Generally speaking there is a 3-4 month turnaround for a valid claim to be refunded. Claims are worked in date order and checked by a supervisor before repayment.
Michael advised that the claim form (Form 60 EC for 8th Directive and Form 60OEC for 13th Directive) must be completed IN FULL. Bank details are required and should include the bank Sort Code, Full Address and COUNTRY. At present there is no facility for electronic transfer of funds but this is something which is being looked at.
A certificate of status is required and must be in date. It is necessary to submit this annually.
A power of attorney must be submitted and is valid for a maximum period of 2 years.
An explanation of circumstances is useful. Quite often claims are self explanatory, but it can be helpful if an explanation is submitted. This should include why the applicant is in Ireland, who and what were the activities.
Michael advised of a simplification procedure available in Ireland whereby a supply can be zero rated where it would normally be a standard rated supply. This is available for supply of continuous services, leasing, marketing agents (but not the signing of contracts) and warranty repair services. These services when made by an Irish supplier when an application is made by the customer. The application can be made for a period of 2 years. After that there is the option to apply for an extension to that zero rating. The advantages are that the foreign customer does not get charged VAT and therefore has no claim to make for refund. Application should be made on Form 60A.
Regarding forthcoming changes, Michael advised that the Revenue Commissioners are currently addressing refund by means of electronic transfer, putting refund forms on the Web and a review of the 8th Directive. Changes will be advised to everyone when they take place. Please note the website address is www.revenue.ie
HM Revenue & Customs – Paul McMenamin
Paul McMenamin, Audit Manager at Derry, Northern Ireland was joined by Paul O’Hagan, Senior business Manager based in Belfast.
The Unit at Derry is responsible for all 8th and 13th Directive reclaims for the United Kingdom.
Paul M set out to provide some facts and figures, highlight some recent developments, discuss working together with Agents and then agreed to field any questions from the delegation.
The Numbers bit A total of 37,102 claims were received in 2005, these can be split into - 20,625 8th Directive claims and 16,477 13th Directive claims. This equates to a total of £274.6 million split £77 million 8th Directive and £197.6 million on 13th Directive. These figures may be slightly distorted as there was a single claim for £61 million.
To take these stats one stage further approx 66.1% of the value of claims come directly from applicants with only 33.9% coming from agents, whilst on the other hand 33.9% of the claims are submitted by applicants and 68.1% from agents.
Paul M highlighted the recent development areas as New Department, Invoicing issues, Face vet procedures, Proposed Reform of the 8th Directive
New Department Paul M explained previously HM Customs & Excise and Inland Revenue had been separate departments (HM customs & Excise totalling approx 25,000 staff). The new department is now HM Revenue & Customs and can be located at www.hmrc.gov.uk Merged together, this new department now represents the largest department within the UK Civil Service at approx 125,000 staff.
In practice HM Customs & Excise had always operated within the VAT regime. The new department now allows access to a full range of tax information as the department will cover all taxes and benefits from the beginning to the end of a life, including such things as Child Benefit through to Retirement Pension and ultimately Death taxes. Access to more information will permit a greater understanding of the full picture across the tax regimes and can only stand to benefit the department when seeking assurance.
Invoicing issues Information Bulletin No 1. Information Bulletin No 2. Consistency with 6th Directive applications Requests for supporting documentation Working together to educate Companies & employees Working with the hotel industry (& other trade bodies)
Information Bulletin 1/05 reminded businesses to support their 8th and 13th EC VAT Directive claims by a valid VAT invoice, ie an invoice containing the name of the taxable person receiving the supply, and all other supporting documentation. This action was intended to address an increase in the number of incomplete claims and fraudulent claims based on invalid invoices. This was issued in response to a fraud that was uncovered.
This bulletin is further to Information Bulletin 1/2005 issued in September. It announces that HMRC have withdrawn their earlier decision that we would only refund claims that were supported by valid VAT invoices. That change, which was due to take effect from 1 January 2006 will not now be introduced. We have received representations that the proposed changes (particularly in relation to hotel expenses) would make it very difficult for overseas companies and the hotel sector to satisfy the basic invoicing requirement so overseas companies would not be able to recover the VAT they incur in the UK. Concern has also been expressed that, by imposing this invoicing requirement, HMRC would be creating an inequitable situation between UK and overseas business. In the light of these representations, we have reviewed our proposed actions. We have now decided that we will not insist on claimants having a valid VAT invoice where business practice is to issue invoices in the name of the employee, in practice mainly in respect of hotel expenses. This means that, where an overseas claimant submits a claim for VAT in respect of hotel or similar expenditure and the invoice does not bear the company name, we will exercise our discretion to accept alternative evidence in support of a claim for input tax. It also means that, where we consider it necessary, we may call for additional evidence to support claims. These are excerpts from Bulletin 2 which can be located at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&id=HMCE_PROD1_024920 The issues raised with HMRC have highlighted the need for us to educate our client base and the need for HMRC to work with both taxpayers and industry sectors in the education program. Agents are reminded that wherever possible invoices should be only be accepted where they are complete with the correct company information and HMRC reserve the right to seek additional assurances before accepting a claim for refund. HMRC have stated that they will not return to old methods. The right to request additional information from a non-established claimant when not in the same proximity as when conducting an audit of records in the UK equates to the right of a visiting officer to request additional back up information from a domestic taxpayer during a VAT audit. This means that there is consistency between 6th, 8th and 13th directives. We had suggested that a pre-emptive list of acceptable evidence would assist agents to submit a full and completely evidenced claim. However, HMRC considered this as a risk assessment. They determined that this course of action would not be without risk and the in some cases it would not be necessary to audit all items, in some cases not any. It was therefore better to request additional information to satisfy a certain assurance question. HMRC are actively trying to reduce fraud and the risk of revenue loss. On this basis they have now introduced a Face Vet Procedure. This was detailed by Peter Bright and Ann Jones in an earlier conference held in Athens in September 2005 (please see Athens minutes) and remains fundamentally unchanged. These procedures were implemented as a response to feedback from our customers and mean that procedural errors are identified pre-audit. Feedback to HMRC had indicated that in some cases a claim might not be processed for upto 5 months and only then queried. Where a claim represented refund of tax for a full year, this could mean that tax refunds remained unpaid for a period of nearly 2 years in the worst case. This was notably more of a problem at deadline time. Simple errors are resolved more quickly which can help to expedite claims at time of submission and thereby avoid ‘reconsideration’ requests. These procedures are fundamental in educating applicants to submit claims earlier.
Proposed reform of 8th directive Proposals were made under the UK Presidency as part of a package of reforms. This reform is currently with Austria who has recently issued a revised text. The matter will maintain a high level of importance under the Finnish presidency. ORU welcome such developments as opportunities to improve customer service. Working together Paul M showed a chart representing the compliance scale and comparing it to the intervention scale required by HMRC. At best the claimant may be 100% compliant requiring no action or intervention by HMRC. At worst, the claimant is obviously non-compliant to the point of taking criminal action and it is necessary for HMRC to prosecute. It is accepted that as 2/3rds of claims are submitted by agents, we both want “to get it right first time” thus ensuring our clients with good service. It is therefore necessary for Agents to understand why HMRC works the way the do any HMRC to understand the workings of Agents. Only this way can we jointly respond to the clients needs, improving quality and service within legislative boundaries. Paul then asked if there were any questions from the delegation. Questions were raised regarding two particular topics.
If there are any other matters our delegates wish to bring to the attention of Paul McMenamin or Paul O’Hagan of HMRC members are requested to direct these through Pam Beighton, Secretary of the Association.
The Commission’s plans in the fight against fraud – M. Donato Raponi M. Raponi stated that the largest and most important type of fraud is Carousel Fraud and advised that this could cover as many as 50 traders in a single chain of supply. The other types of fraud are abuse of the margin scheme, e-commerce and the black economy. Carousel fraud exploits weaknesses of current VAT arrangements for Intra-Community supplies and usually takes place where a mixture of exempt transactions and taxed transactions offer the opportunity for fraud. This type of fraud normally involves persons who are active for a very short period. The Commission launched a VAT Strategy in 2000, which was a program aimed at improving the current VAT system. The four pillars of the VAT Strategy are
To this end, the Commission hopes to strengthen administrative cooperation by means of new legislation - Council Regulation 1798/2003 - Implementing Commission Regulation 1925/2004 And by non-legislative actions taken by the Commission - seminars for tax inspectors; - exchange of experiences and best practices Many meetings have taken place at ground level and there is a possibility of a seminar when the 8th Directive is re-published. M. Raponi made it clear that the Commission does not want to interfere with the competence of each Authority, only to facilitate cooperation between member states. It was hoped, back in 1992, that there would be a single set of rules. The Commission is now realistic in its view and appreciates how complicated the VAT system is.
Recent Developments Despite efforts by the Commission and Administrations carousel fraud continues. As it becomes more complex as time goes on, the fight against fraud becomes more and more important on a political level. The latest centres for this type of fraud are Dubai and Switzerland and seem to involve mobile phones. There have been requests for derogation based on article 27 of the 6th directive by Member States on substantial changes to the system aimed a simplifying the rules: Germany - 1st Versteuerung Reverse Charge: threshold of 5000 € + following of the goods by the tax administration line by line (circa 200m transx per year) Austria: Reverse Charge: threshold of 10000 € + without following of the goods to be presented by traders as a monthly statement. UK: Reverse charge for specific products We must consider whether Article 27 of the 6th EC Directive is the right legal base to change the VAT system. A high level meeting and working group has been set up to consider and report on the reverse charge mechanisms with specific reference to fraud. First discussions are taking place and the working group is due to report to the Ecofin on 7th June 2006. The current product ranges appear to be mobile/cell phones, components and computer chips. The majority of member states see a need to change the present system. The US have a similar problem in relation to their sales tax. However, it is less of a problem as rates are low. It is unlikely that we will change the 6th EC Directive as we would need all 25 member states to agree.. The Commission must examine any proposed change from a neutral point of view. Discussions must take place with Administrations, Associations like the IVA and with businesses. The EU does have a Regulation in place (although this is not applied by member states) to operate with JOINT CONTROL. Most member states have been unaware of this regularisation and therefore it has not been enforced. The Commission set up criteria is as follows:
There is a great deal of political pressure and in Germany and Austria the matter is very important. It is optional that member states could apply the regulation. Whether or not it would work – there is no definitive answer but a great deal of danger has been recognised. Therefore we must enforce Administrative cooperation. We may in future share a database of information, but first we must decide what information to share. Regulations regarding private information differ in each member state. Regarding amendments to the 6th EC Directive, the decision rests with he Commission, who have the right of initiative. Otherwise member states cannot change. The Commission must therefore examine the consequences. Austria and Germany have suggested a similar system differing in the controls at different levels. VAT effectively becomes a virtual tax and becomes payable at retail stage in the transaction chain. This would put the burden of tax at the weakest link in the chain. The UK reverse charge suggestion without any additional reporting would become a ‘self-policing‘ tax. France experienced such a tax system in the 1950’s and found it to be riddled with fraud, as did Finland some 10 years ago. Distance sales thresholds are currently the decision of each member state and not the EU Commission. Member states therefore accept the risk. Under the One Stop Shop, the Commission would like a single place of declaration, i.e. if a Taxpayer is registered in the UK, the UK Administration must collect and French TVA due and then the UK Administration must pay the monies across to the French Administration. We note at this point, Fraudsters take advantage of borders! Just as in the 1930’s Prohibition, police were stationed at each side of the border and the FBI found it necessary to create a Cross Border Control. Only a single meeting has taken place to discuss a ‘clearing house’ system. It is apparent that member states will never accept the reported figures from other member states. Fraud has become a political issue to which we MUST find a solution. Changing the VAT system may not necessarily be the solution. At this stage, the Commission will not accept responsibility. When considering the UK derogation request we must take into account previous observations regarding Social Security. Each time a loop hole was found and used to defraud the State, the Government changed the law. We must ask is it the same with the UK. If the UK derogation was accepted, fraud may just move to a different product group. We also note that fraud tends to move Country to Country, i.e. Netherlands – UK – Spain. Currently the exchange of information on VIES takes approximately 7 months, whilst a typical carousel fraud can take on 3-4 months. Maybe one day we will be able to share a database to tackle fraud where information can be exchanged within a few days. The EU was set up to operate as a single market, though it is difficult to convince some member states that is the case. The Commission would therefore welcome a debate by IVA members and appreciate feedback from the Association.
Financial Position – Pam Beighton Pam showed a copy of the accounts to year ending 31st December 2005. These accounts show a ‘profit’ of approx €9,400. Whilst on paper this represents an annual profit, we must recognise that only now, after 3 years, are we drawing level with the losses made in previous years. The Association still has to act with prudence should we wish to continue running at the same subscription levels and increase our activity in terms of making representations to Administrations on behalf of our membership. It must also be recognised that longer conferences will of course be reflected in a higher budget. The venue requirements are changing as the Association evolves. We are looking now to a 5* hotel to be able to offer the guest accommodation and seminar facilities large enough to house a group of our size.
Identity Fraud – Martyn Redman Martyn detailed a SCAM and issued a warning to other members regarding identity theft. A party totally unconnected with Eurocash Corporation or any IVA members had made an identical copy of the Eurocash website, adding just one extra page. The fraudulent company issued cheques to people, suggesting they deduct 10% from the value of the cheque received and forward a cheque for the remaining 90% to Eurocash. Cheques were issued by the fraudulent company using stationery identical to that used by Eurocash. If people follow the instructions, they will discover the cheques they have been sent are fraudulent and end up out of pocket. The postmark of the envelopes used comes from Latvia and the fraudulent copy website has now been traced to Russia. This is a very serious matter where the FBI have been notified in addition to the International Crime Unit within the UK. Other members are warned to take care and remain vigilant at all times.
AFTERNOON WORKSHOPS
Workshop 1: FRANCE
This session looked at the practical issues of filing refund applications in France and addressed new developments. The purpose of the workshop was also to address what the International VAT Association would like to propose to the French Administration to improve their draft proposal.
April 10, 2006 – Hotel and restaurant invoices require the name and address of the claimant. These details can now be added by hand or by company stamp where the invoice is less than €150
Road Tolls: Legislation was previously passed to allow recovery of VAT on road tolls from 2006. New legislation permits recovery of VAT on tolls between 1996 and 2000, which is an interesting development for haulage companies. There are practical problems in obtaining the toll invoices. It is necessary to file an original invoice, a copy or a downloaded copy from the internet (but you still need the invoice details to be able to download.) Only then can you claim through the 8th Directive. There has been no answer yet with regard to a deadline for filing these claims but we would suggest by 30th June 2006. The deadline will probably be the next VAT year + 2 years.
Reverse Charge Mechanism (RCM) From 1 September 2006 the French Administration will apply the new rule. Yesterday they released a working draft:
Law 1: Apply on all services and if the buyer has a French VAT ID (VAT registration or Establishment); can be FR or DE company as long as he has a French ID number.
Example A Belgium company delivers goods in France. Presently, if the stock is in France then the Belgian company should register. Under the new rule, the Belgian company will not need to register provided the goods are kept less than three months.
If the buyer of the goods is not French and not registered in France then RCM does not apply. Example
The supplier must register in France to charge French VAT to non FR ID clients. There are some exceptions to this rule, for instance, Rental of premises. In addition, the supplier (EU or non-EU) will be able to charge VAT only if he nominates a French Fiscal Representative who will take the responsibility of the VAT liability.
The recommendation from this workshop is that the IVA should send a French delegation to discuss these proposals with the French Administration.
Workshop 2: FRAUD
Topic 1
Your company submits VAT 8th and 13th Directive refund claims to tax authorities throughout Europe. In some countries you submit claims yourself on behalf of your clients and in other countries you submit claims through a locally based agent. You also receive claims from agents in other countries who need assistance in claiming refunds in your country.
You receive a visit from your tax authorities who inform you that they have checked claims submitted by you which you received from another agent in Romania for a Romanian business, and found the invoices to be false. They inform you that they intend to prosecute you and your company for making fraudulent claims.
Discuss what action you would take in these circumstances and what action you would take to prevent a re-occurrence.
Topic 2
Your company acts as a fiscal representative for an overseas company who has a business in your country and is VAT registered.
You complete a VAT return on behalf of the company and on the basis of records provided to you by the company.
When a check is made by your local tax inspector you are informed that they believe the company has undeclared sales on the basis of information they have received from another customer of that company. You as fiscal representative have signed the VAT returns which are incorrect and are liable for the company’s under declared VAT and can be prosecuted for submitting incorrect VAT returns.
Discuss
Workshop 3: ECJ CASE REVIEW For this workshop, please refer to the powerpoint slide presentation
Closing Comments Following feedback to the main delegation from all three workshop sessions Jean-Claude Bouchard thanked our guest speakers. He also thanked the delegates for their input to another successful meeting. The venue for the next meeting is set for Budapest, Hungary, dates to be confirmed in order not to clash with other meetings and holidays.
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