Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Reverse charge ' the answer? By Rebecca Benneyworth

by
23rd Aug 2006
Save content
Have you found this content useful? Use the button above to save it to your profile.

Enabling legislation is included in this year's Finance Act to require traders selling certain goods to account for VAT under the reverse charge procedure. The change is intended to reduce, or it is hoped eliminate, missing trader fraud, which is currently costing around £2 billion a year in lost tax.

Tax is lost when traders purchase goods which are exported to the EU, reclaiming their VAT on the purchase, as the sale is not liable to UK VAT as an EU export. The loss of tax arises because the business supplying the goods disappears without accounting for the output tax on the sale. HMRC are left to pay out an input tax claim to a trader when they have not received the corresponding output tax. Earlier this year, HMRC hit on the idea of the reverse charge principle to deal with this problem. We have now applied to the EU for a derogation to allow certain types of goods to come within the procedures normally reserved for cross border supplies of services.

Traders dealing in a number of electrical items are now being advised to start making preparations for the new reverse charge VAT procedures which could be implemented as early as October this year.

The reverse charge procedure involves sellers of items to business users (including those who will sell on the goods) not to charge VAT on the sale. The seller will then be asked to prepare a sales list of customers and values where the reverse charge has been applied.

The business customer will then account for both output and input tax himself ' that is declare output tax on his own return under the reverse charge principle, and then be permitted to claim the same VAT back as an input tax deduction, provided that the normal conditions apply.

It is easy to see that by introducing the reverse charge procedure, the mis-match between repaid input tax and the corresponding output tax will end, effectively eliminating the fraud. It almost seems so simple one might wonder why it has not been thought of before. As soon as clearance from the EU is received the measures will be implemented, so businesses will need to start preparing their systems for the new rules. Meanwhile, detailed regulations to implement the regime are being prepared.

It is likely that businesses dealing in the following types of goods will be affected :

  • mobile telephones
  • computer chips/microprocessors/central processing units
  • electronic storage medium which may be used in, or in connection with, computers, or any device in categories 1 and 4
  • electronic devices used for the storage, processing or recording of electronic data as follows:
  • a) handheld devices for recording or playing of sound and or images
    b) handheld computers
    c) handheld communication devices other than mobile telephones
    d) positional determination devices for GPS system
    e) games consoles with screen, or of a kind used with a television or computer

    This extends the new rules beyond the previous scope of other anti-avoidance law, which was largely confined to mobile phone handsets and computer chips. It is likely that many more dealers will be affected; businesses selling to the general public will still charge VAT on their sales, but will be affected by reverse charge on their purchases.

    As someone who deals regularly with VAT, it seems to me that the new rules will be the answer to the problem, as they effectively eliminate the opportunity for traders to disappear with output tax that has not been paid over to HMRC. In all cases where input tax repayment is sought, this is effectively "accompanied" by the corresponding output tax, eliminating the problem at source. However, traders are going to be put to quite a lot of trouble to deal with this. There is a de minimis of £1,000, which means that if the value of transactions with a single business is less than this amount in a VAT period, the reverse charge will not apply, so a smaller business purchasing a new mobile phone handset or blackberry should not be affected. However, a larger business, equipping a number of staff with new equipment could well be caught by the rules, so it is not just businesses which deal in these items that will be affected.

    Are there any affected businesses or other readers who can see a flaw in this plan? Otherwise, of course, the question to be asked is why did nobody think of this before?

    Tags:

    Replies (5)

    Please login or register to join the discussion.

    avatar
    By riversp
    05th Sep 2006 14:40

    Massive headache
    I work for a retailer that sells both to private individuals and VAT registered businesses. If I've understood correctly, these changes could cause us huge problems, both from administering the reverse charge on purchases and ensuring that VAT is not charged on sales above £1,000 per quarter on affected products to the same customer.

    Thanks (0)
    avatar
    By AnonymousUser
    23rd Aug 2006 16:45

    Very low de-minimis
    I am struck by the very low de-minimis of only £1000. Is that per quarter or per year?
    It looks as if companies buying large amounts of computer hardware will be caught.
    'electronic storage medium' covers a huge range of different divices.
    Where did the list of items affected come from?

    Thanks (0)
    avatar
    By User deleted
    23rd Aug 2006 10:41

    Dilatory ivory-tower academics
    The attitude of the EU commission (and its member states) to changing the VAT system that currently allows huge and increasing amounts of money (our money, MY MONEY) to be stolen every day is scandalous. The latest EU news release on this I know of is here:

    http://europa.eu/rapid/pressReleasesAction.

    It is full of civil service speak (suggest, give consideration to, opening a debate) when the need is for action.

    Too much attention is being given to the hallowed principle of free movement of capital, labour and goods at the expense of huge fraud. It should not be beyond the wit of those involved to tackle this effectively and now at no expense to the taxpayers and with no effect on freedom of movement.

    Still, what can you expect from a bunch of inept pen-pushers whose only real competence lies in lining their own pockets at our cost?

    Thanks (0)
    avatar
    By User deleted
    23rd Aug 2006 12:02

    There is nothing they can do really
    The list will continue to expand as high value items continue to grow. Silver bullion comes to mind immediately etc. Then, how about digital product, softwares etc. the list goes on.

    The system is just unworkable and it increses suffering of legitimate business. The EU/government is simply trying to shift responsibility of policing a broken system to the citizen (while government role is supposed to leave citizen to enjoy their private life as much as possible).

    And then they let those carousel fraundster escape too easily (one is in switzerland, the other walk off a court session and disappear), the next one will be out of the prison in less than half of the term due to good behaviour..

    Thanks (0)
    avatar
    By janiskirkham
    24th Aug 2006 00:10

    Reverse charge
    Brussels have said no to Germany and Austria applying this across the board. Lets make it simple - return to pre 1992 accounting for tax on arrival at country of destination. Simplified S.A.D and get rid of Intrastat and E.C. Sales lists in the process.

    Thanks (0)