Last December, the European Commission adopted a Communication on a coordinated strategy to improve the fight against VAT fraud in the European Union presenting an action plan for future legislative measures to enhance the capacity of tax administrations to prevent or detect VAT fraud.

The Commission has said that it is “conscious that a number of these proposals are quite substantial and touch on the difficult balance between burdens on business and effective tax administration; a sensitive issue that may provoke an extensive debate when the Commission tables its concrete proposals.” Moreover, the Commission said, “certain long established administrative practices will need to be changed and member states will have to show the necessary flexibility and willingness to adapt.”

The Commission is, once again, not respecting the subsidiarity principle.

The European Scrutiny Committee has recently discussed the Commission Proposal for a Draft Directive amending Directive 2006/112/EC on the common system of value added tax as regards tax evasion linked to import and other cross-border transactions.

Presently, the importation of goods is exempt from VAT if followed by a transfer of the same goods to a taxable person in another Member State. The Member States laid down the conditions under which that exemption is granted. Such procedure is known in the UK as Onward Supply Relief. Relief is granted at initial importation if the VAT is declared, and paid, in the Member State of destination.

The Commission has stressed that Member States have applied this exemption differently which has been exploited by traders to avoid payment of VAT on goods imported. The Commission has proposed to tighten the conditions under which the importer can benefit from the VAT exemption.

The Commission has decided to amend the Directive introducing three conditions for the exemption from VAT upon importation to apply. The importer would be therefore required to be identified for VAT purposes or to appoint a fiscal representative in the Member State of importation, to provide at the time of importation, the VAT identification number of the taxable person to whom the goods will be sent in that other Member State and he shall prove that the goods will leave the Member State of importation in order to be transported or dispatched to another Member State.

Presently, in the UK, the person invoking this exemption only has to certify that he will prove that the goods have been transported to another Member State, if requested.

According to the Financial Secretary to the Treasury, Stephen Timms, the existing rules on exemption from VAT at importation are inadequate however the Government believes that the Commission’s proposal will have limited impact while imposing further burdens on business as they would have to submit proof that the goods will be transported to another Member State.

The Commission has stressed that traders in intra-community supplies intentionally do not report their supply to the tax authorities. Consequently, the Member State of destination has no information about the arrival of goods on its territory, which hampers the detection of potential VAT losses.

The Commission’s proposal is aiming at ensuring that businesses making intra-Community supplies of goods observe their obligation to report the supplies in a recapitulative statement (EC Sales List). The tax authorities in the Member State of destination (acquisition) become aware, with the recapitulative statement, that goods have been supplied to a taxable person in their territory and that tax should be accounted for by the recipient.

The Commission’s draft proposal would introduce a specific conditional and obligatory joint and several liability rule for cases whereby the supplier contributed by omission to a loss of the VAT payable in respect of the intra- Community acquisition of goods in another Member State by not presenting or presenting late his recapitulative statement or by not reporting all the information related to this intra-Community supply.

The Commission is aiming at establishing an automatic system that overrides proportionality in order to facilitate Member States to take action against alleged fraudsters.

According to the Commission the proposal respects the principle of proportionality since the measure introduces the liability of the supplier only if the acquirer has not submitted his VAT return related to the acquisition to his tax authority. Furthermore, the supplier may refute the presumption of liability by duly justifying his shortcoming in his reporting obligations to the competent tax authority.

As regards joint and several liability the UK has already implemented domestic joint and several liability provisions and Stephen Timms said to the European Scrutiny Committee that the Government is willing to work at Community level in order that such provisions could be applied across borders. However, the minister is concerned with the Commission’s proposed amendment.

The Government has serious doubts over whether the proposal would have any anti-fraud benefit. The Commission wants to ensure that suppliers obey to the obligation to report their intra- Community supplies of goods on their recapitulative statements. However, according to the minister, the Commission proposal will have no effect as in the majority of cases suppliers involved in cross border fraud comply with their reporting obligations.

The Government believes that the proposal is not proportional since a supplier would become liable for the tax obligations of the customer if it failed to submit a recapitulative statement properly, without the need to identify a tax loss. Furthermore, the tax authorities are not required to show that the supplier intentionally contrived to facilitate the fraud or was negligent in facilitating the fraud to take place.

The proposal has not provided for a requirement to prove involvement in fraud or for an assumption that the supplier was involved in fraud where both the recapitulative statement and VAT return are not completed properly.

The European Court of Justice has ruled that it was essential that businesses had the opportunity to rebut any presumption that they had knowledge of the fraud. The proposal provides that suppliers may not be held liable if they can justify their failure to submit recapitulative statement or any inaccuracies in it however the Government believes that such provisions are not clear and that “innocent traders could be affected.”

Obviously, the Member States flexibility in tackling fraud effectively would be restricted. The Government is also concerned with the lack of Member States discretion under the proposal since they would be obliged to pursue the supplier, even when they would want to pursue another fraud player.

The proposal is going through the consultation procedure and unanimity is required at the Council. This is one of the few cases where the UK can, in fact, veto the proposal. It remains to be seen what will come out from the Council’s negotiations.