Carousel Fraud – new accounting procedures from 01-06-07 (Government Departments)
04-04-2007
The UK Government has been concerned for some time about the VAT losses which are occurring as a result of what is usually called carousel fraud, more formally called Missing Trader Intra-Community (MTIC) fraud. This fraud relates principally to goods such as mobile phones and computer chips and some other electronic goods. Estimates of losses to the UK economy range from £2billion to £8billion a year.
To combat this fraud the Government has for some time been seeking the agreement of other EU member states to the use of a reverse charge accounting procedure which it believes will help to reduce the problem. The introduction of the new rules has been delayed because some EU countries would not agree to the introduction of the reverse charge procedure, but the Government has now secured the necessary agreement of the EU to these measures and the new rules will be introduced on 1 June 2007.
Where the relevant conditions are met UK suppliers of such goods will operate the following procedure:
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VAT will not be charged on the invoice for the supply of relevant goods.
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The customer will be required to account for the VAT due via their VAT return.
The relevant conditions are as follows:
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The goods are either mobile phones* or computer chips
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The value of the supply is £5,000 or more
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The customer will use the goods wholly or partly for business purposes
* Mobile phones include Blackberrys and Pay as You Go
phones. Phones which are supplied with an airtime contract
are excluded from the measure.
The accounting procedure is as follows:
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Output tax on the supply must be included in Box 1 of the customer’s VAT return. The supplier is required to state the amount of VAT which must be accounted for via this procedure on their invoice, and this should be 17.5% of the net value.
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The VAT can be recovered by inclusion in Box 4 of the VAT return, subject to the normal rules, i.e. the VAT must be attributable to a taxable business supply.
How will this affect Government Departments and Executive Agencies?
This procedure applies in principle to Government Departments (GDs) in the same way as to any other VAT registered organisation.
However, the procedure only applies where there will be some element of business use of the goods. As far as GDs are concerned, most activities of a statutory nature which are funded by Government grants or statutory charges are treated as “non business” activities for VAT purposes. Where a GD provides goods and services to third parties in competition with other providers, it is undertaking business activities and must follow the normal VAT rules.
As a result of the particular status of GDs, you will need to advise your suppliers whether the goods will be used for business or non-business purposes. There is no de minimis level of business use, so if, for example, mobile phones are being purchased for the use of a number of staff, some of whom are engaged in some level of business activity, then the procedure will apply.
In most cases the use of the goods will be mainly for GD statutory non-business purposes, and so there will be no or very limited scope for GDs to recover the VAT which will be accounted for on the VAT return. This will therefore put the GD in the same position as if the supplier had charged VAT.
It should be possible to identify the relevant invoices by the statement which suppliers should include on their invoices and we would therefore recommend that both procurement and payments staff are advised of the new rules so that relevant invoices are identified and the correct accounting procedure is applied.
If you have any queries on these new rules please call your usual VAT Liaison contact or our VAT Helpline on 0800 700 652.