Business and business associations

Frequently asked questions for buisness and business associations

Q1: How much money is lost to VAT and Carousel fraud?

Q2: What makes carousel and VAT fraud possible?

Q3: What technologies are available to solve carousel fraud?

Q4: What about other forms of VAT fraud?

Q5: What are the benefits for business?

Q6: Possible downsides for SMEs

Q7: How could real time VAT payment work?

Q8: How would the RTvat system work with splitting out exempt goods, full rates and reduced rate VAT goods?

Q9: What are the changes necessary to implement this type of solution?

Q10: What about e-commerce?

Q11: What would the bank’s role be?

Q12: Who could supply the technology?

Q13: How much will it cost to implement?

Q14: How could the solution be financed?

Q15: Who are RTvat and what could their role be?

Q16: How can I find out more?

A1: How much money is lost to VAT and carousel fraud?

Although there’s no definitive figure, based on statistics from the UK and Germany it’s generally agreed that the ‘VAT gap’ due to uncollected tax and fraud costs around €120 billion per annum; that’s €325 million per day, €10 million per hour, or €200,000 for each minute that passes without a solution. Carousel fraud is estimated to account for 25% of this.

It is estimated that if all the VAT due was collected the increase in revenue would be sufficient to allow the tax authorities to decrease the rate by 1.1%.

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A2: What makes carousel and VAT fraud possible?

 “Lack of speed makes carousel fraud an issue”

There are a number of contributing factors which combine to produce a system where fraud is possible:

• The delay between a merchant collecting tax from a sale and remitting it to the Tax Authority
• Lack of communication between tax authorities in different countries
• Slow and inefficient legacy data systems in most member states
• Lack of accurate data on fraud
• By using a system of taxing on invoice rather than on settlement, the fraudsters are able to receive claims for credits before the seller has deposited the VAT.

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A3: What technologies are available to solve carousel fraud?

In the modern technology-led financial world, there are well-established technologies available to drastically reduce the opportunity for VAT fraud; indeed these technologies are already widespread in the banking and settlement industries, where they operate at capacities and speeds significantly in excess of what would be required for the RTvat proposal.

Real time VAT collection will eliminate carousel fraud completely because the tax is removed automatically at settlement through the seller’s bank account, so the merchant never has access to the VAT component of the sale price.

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A4: What about other forms of VAT fraud?

The implementation of VAT collection on settlement rather than on invoice will make a major reduction in other areas of VAT fraud and non-collection; these include reduction on losses due to bankruptcy, general non compliance, and general evasion. The simplification of administrative reporting is a benefit to both the merchant and the tax authority.

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A5: What are the benefits for business?

• VAT settlement will be completed within a 24 hour period rather than the 3-4 months it can take under the current system.
• The administration overhead for all merchants throughout the EU becomes much simpler, with much of the required accounting produced automatically as a transaction report from the flow of funds through the bank account.
• By ensuring immediate settlement of the tax due and recovered, the merchant’s cashflow position becomes much clearer and the potential for unintentional bankruptcy resulting from an unexpected end-of-period VAT demand much reduced.
• Use of fraud checking provides legitimate business validation.
• By greatly increasing the proportion of VAT recovered, governments have the capacity to reduce taxation.
• Difference in VAT rates between EU member states no longer have an impact as all transactions are taxed at the seller’s prevailing rate.

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A6: Possible downsides for SMEs:

The decrease in the administrative work and simple collection of vat credits are of benefit but many SMEs are used to having the cashflow advantage of delaying VAT payment.

One suggestion is that tax authorities may allow a subsidy in the transition phase.

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A7: How could real time VAT payment work?

• Funds would be automatically transferred from the merchant’s bank account to the tax authority on a net basis once per day, based on all transactions completed that day, with corresponding tax reclaims and refunds automatically credited back within a 24 hour period.
• A VAT purchasing card could be used by each business, linked to their unique VAT ID, to simplify the electronic transaction process. The responsibility would still lie with the merchant to correctly apply the appropriate VAT rates for each purchase.
• New national servers in each of the 27 EU countries would greatly simplify the process of collection and refund between businesses in different member states.
• The system would be implemented across all EU member states avoiding parallel systems and their accompanying increase in administration costs.

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A8: How would the RTvat system work with splitting out exempt goods, full rates and reduced rate VAT goods?

The databases built in conjunction with the new server network are fully capable of identifying any relevant information on a merchant-by-merchant basis, as well as incorporating specific routines and rules reflecting the differing national regulations of each Tax Authority.

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A9: What are the changes necessary to implement this type of solution?

It is widely recognised that changes to the VAT system are inevitable and necessary to stem the enormous losses due to fraud; the opportunity is to ensure that them most effective and appropriate changes are implemented with the least possible disruption to businesses and administration.

The changes required for the RTvat solution include:

• Move from a system of VAT payable on invoice to one of VAT payable on settlement.
• Implement a system whereby VAT is paid to the tax authority directly from each merchant’s bank account.
• Intra-EU transactions would be taxed at the seller’s rate, with the correct percentage credited back to the VAT-registered buyer’s account via the intra-EU server system.

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A10: What about E-commerce?

E-commerce transactions fall within the same rules, with the merchant charging any EU entity at the appropriate rate.

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A11: What would the bank’s role be?

• The bank would act as a ‘splitter of funds’, to the benefit of both the merchant and the individual tax authorities.
• The bank could also act as an issuing agent for a purchasing card linked to individual VAT numbers to be used by the merchant for recoverable VAT purchases.
• Transaction reports automatically generated by the bank as part of the account maintenance process would reduce the administrative burden on their business customers and avoid the risk of non-delivery penalties.
• The bank would remit the tax due from the merchant directly to the Tax Authority, less a small transaction fee.

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A12: Who could supply the technology?

The technology is well established in many areas where real-time financial data is exchanged on a significant scale; particularly the credit card and banking industries.

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A13: How much will it cost to implement?

Inevitably there will be start-up costs to build the technology infrastructure and to re-position existing administrative infrastructure to handle the new systems. However it is anticipated that the savings to be recouped will rapidly compensate for these initial costs. The RTvat proposal assumes that a for profit consortium will handle all of these costs, so tax authorities have no actual costs.

Technology infrastructure:see separate estimates, but the total is anticipated to be at most the equivalent to the amounts lost from ten days of continuing fraud. The plan is to bring in a for-profit group of companies that will build out the whole program and receive a small percentage of what is recovered due to the implementation of the RTvat system.

Businesses: there will be some overhead in re-training staff and accountancy costs in switching to the new system, but such costs are inevitable with any envisaged change to the way in which VAT is operated. Using the RTvat system, the reduction in administrative overheads and reporting requirements should more than compensate for short-term losses. This is in comparison to the far more demanding administrative costs involved if a reverse charge mechanism was introduced, or even worse, was run in parallel wit the existing system. 

Businesses will lose the advantage of the use of collected funds due to the Tax Authority to bolster their cashflow position; however by receiving immediate refunds on reclaimable VAT their cashflow becomes much clearer, reducing the risk of avoidable bankruptcy due to unexpected tax demands.

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A14: How could the solution be financed?

There are a number of possible financial models; the important point is that the entire systems could be financed from recovery of just a few days' losses.

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A15: Who are RTvat and what could their role be?

RTvat was formed by the International E-commerce Association (Intecard); it is now being established as a separate not-for-profit organisation which has the sole intended purpose of bringing about a fast implementation of the RTvat solution.

RTvat has considerable experience in transaction processing in partnership with banks, card associations, processors, fraud monitoring systems and insurers. RTvat has no plans to become a for-profit group but does intend to work with stakeholders in government and business.

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A16: How can I find out more?

> Contact us if there area any aspects you would like to discuss.

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To find out more about our Real-Time EU VAT solution, contact us.