Higher VAT raises fear of cross-border fraud
Increases in value added tax will come into force across Europe next month as governments turn to indirect tax to shore up public finances, sparking concerns about the region’s susceptibility to cross-border fraud that has already cost tens of billions of euros.
The number and scale of the VAT increases due to take place next year are unparalleled, said Richard Asquith at TMF Group, an accounting services company. “This is unprecedented and a real symptom of the economic climate as governments squeeze the consumer to keep business taxes low.”
At least half a dozen countries have ratified tax increases for the beginning of 2011. Within the European Union, these include the UK – 17.5 per cent to 20 per cent; Portugal – 21 per cent to 23 per cent; Poland – 22 per cent to 23 per cent; Latvia – 21 per cent to 22 per cent; and Slovakia – 19 per cent to 20 per cent.
The higher rates are set to boost the incentive for criminal gangs to pursue so-called missing trader or carousel fraud. This is a complex scam which involves taking advantage of the zero-rating of cross-border trade within the EU to make fraudulent claims for VAT refunds.
For example, a trader may import a van load of mobile phones from France, free of VAT, then add the VAT when selling them on in Britain. Instead of handing the VAT to the tax authorities, the trader pockets the money.
Such “missing trader intra-community” (MTIC) fraud historically revolved around buying and selling mobile phones and computer chips. However, fraudsters have migrated into other areas, targeting gas and power trading, the UK’s Serious Organised Crime Agency said recently.
This type of fraud was a big contributor to the €90bn-€113bn a year VAT “gap”, according to a European Commission report last year. This gap is the difference between the tax governments believe they ought to collect and the tax actually paid. It also includes legal avoidance and unpaid bills due to insolvencies.
Jason Collins, a partner at the law firm McGrigors, said higher VAT rates would increase the scale of the thefts and influence criminals’ choice of country to pursue this type of fraud.
The fraud has been on the wane recently in the UK, partly because much of the criminal activity has moved to continental Europe to take advantage of their higher VAT rates. But the UK risks a resurgence once its VAT rate is higher than other countries such as Germany and the Netherlands, where VAT is 19 per cent.
Improving the European VAT system’s resistance to fraud was one of the drivers behind the launch of a European Commission green paper this month that proposes radical reforms to the way the tax is collected.
It highlights the growing importance of VAT in Europe, which accounts for 21.4 per cent of the national tax revenues of EU member states, a rise of 12 per cent since 1995. It says reliance on VAT has increased, given the slump in direct and property-related taxes since the recession.
The indirect tax hikes are not just an EU phenomenon. For example, Switzerland is also proposing a VAT increase (7.6 per cent to 8 per cent), while Malaysia’s service tax rate will increase from 5 per cent to 6 per cent.
More increases are scheduled. Shortly before Christmas, Finland’s finance ministry suggested that VAT rates there should go up by two percentage points in order to finance a €2bn ($2.7bn) cut in income taxes and encourage people to work more.
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