Commissioners, MEPs and EU government representatives

Frequently asked questions for government representatives

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: How could real time VAT payment work?

Q6: What are the overall benefits of using this technology for real time VAT payment?

Q7: How would the RTvat system work with splitting out exempt goods, full rates and reduced rate VAT goods?

Q8: What are the changes necessary to implement this type of solution?

Q9: What about intra EU transactions?

Q10: What about e-commerce?

Q11: Are there privacy/confidentiality issues linked to this technology solution?

Q12: What would the bank’s role be?

Q13: What would the individual state tax authority’s role be?

Q14: Who could supply the technology?

Q15: Are there particular legal aspects between countries?

Q16: How much will it cost to implement?

Q17: How could the solution be financed?

Q18: What is going to happen to all the money saved?

Q19: Who are RTvat and what could their role be?

Q20: 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.

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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.

Fraud scoring is now an established feature of the credit card business, with specialist software available to create neural networks to monitor patterns of potentially fraudulent activity. The software automatically tracks whether the business activity is consistent with the VAT collected, merchant’s turnover, usual spending pattern, credits claimed, and whether suppliers are of the kind normally expected for the different types of business.

Automatic checking is implemented so that confidentiality is preserved, and all of this data would be solely based on the national server and thus under the control of the domestic tax authority.

Tax authorities will be able to make better use of their staff, no longer having to watch for carousel fraud. They will be able to concentrate on the fraud reports produced by the fraud scoring system, which are formed in a listing structure showing most ‘at risk’ first.

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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: 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.
• New national servers in each of the 27 EU countries controlled by the national Tax Authorities would be linked to existing legacy systems to produce detailed transaction reports and watch for fraudulent activity. Each national server would be linked to an independent central European ‘clearing house’ server to deal with intra-EU transactions.

See > RTvat animated presentation - the RTvat real-time solution for carousel fraud and other VAT fraud (Flash)

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A6: What are the overall benefits of using this technology for real time VAT payment?

Tax authorities

• By moving to real-time settlement, the potential for missing trader fraud and carousel fraud totally disappears, and potential for other losses due to bankruptcy, mismanagement and inefficiency is drastically reduced.
• By establishing a cross-border data and funds transfer system, funds due to each member state’s Tax Authority can be collected at the applicable rate due in the seller’s country, with refunds due in the buyer’s country, and the correct net amounts paid directly to the appropriate Authority at the prevailing rate.
• Using the neural network, potential fraudulent activity can be rapidly identified and flagged for action in time for the Tax Authority to delay the release of the credit.

Business

• 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

Banks

• Within the new system, the bank has a much clearer view of its customer’s cashflow position, minimising the impact of unexpected large VAT demands on the company’s credit worthiness.
• The bank is in a position to provide its customers with an additional valuable reporting service to help reduce administrative costs.
• There is a potential new revenue stream on transaction charges to the Tax Authority for providing the information and fund transfer.

Governments

• By greatly increasing the proportion of VAT recovered, governments have the ability to reduce taxation, increase efficiency and channel much-needed funds to other areas such as arts, heritage, leisure and good causes.
• With the simple cross-border settlement system, governments can reach bilateral agreements with other member states on the proportion of VAT recovered.

The EU

• Adopting this system provides a simple, rapid, trusted, secure, auditable and flexible technology across all member states, harmonising the disparate systems and allowing simple exchange of information across national borders.
• The release of large volumes of funds currently being lost to carousel fraud by national governments releases money to be used for individual member state projects, reducing the overall burden on the EU-wide budget.
• The fully funded nature of the project requires no up-front costs to the EU.

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A7: 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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A8: 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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A9: What about intra EU transactions?

Transactions between EU member states are currently regarded as being taxed as ‘zero rated’ at the point of export. This both provides a useful loophole for fraudsters and creates an imbalance in VAT collections between member states.

RTvat’s solution would involve:

• The creation of a network of national servers controlled by each individual tax authority
• The establishment of a central independent ‘clearing house’ server
• Real-time transfer of balancing settlements between member states, with tax applied at the prevailing rate in the buyer’s country
• Bilateral agreements to compensate those states who may be concerned about a net revenue loss (but note that overall tax revenue increase should more than compensate for such losses)
• Privacy and confidentiality would be retained by national Tax Authorities

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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: Are there privacy/confidentiality issues linked to this technology solution?

The network of national servers remain completely under the control of the national Tax Authorities and only the necessary transaction information is passed through the central server, identified by the merchant’s unique EU VAT code.

The information from the neural network controlling fraud scoring will be available to the national Tax Authorities to follow up according to their own procedures and priorities. Information gained will be relevant to internal fraud as well as cross-border and carousel fraud.

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A12: 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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A13: What would the individual state tax authority’s role be?

Each individual tax authority would be required to:

• Oversee the transfer of data to the new national servers and the flow of data to the central clearing house server
• Oversee the integration of the new servers with existing legacy systems
• Act on information received from the fraud scoring system produced by the central neural network to rapidly identify and eliminate suspicious behaviour
• Collect the VAT funds due directly from the merchants’ bank accounts via the automatic electronic transfer

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A14: 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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A15: Are there particular legal aspects between countries?

EU directives will need to be agreed in order to resolve cross-border issues
Bilateral agreements between individual countries can ‘fine-tune’ the system to cater for particular concerns or circumstances.

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A16: 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.

Implementation costs can be expected in the following areas:

Tax authorities: integration with legacy systems and redeployment of staff from administration to fraud protection; information and education of businesses to use the new system.

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.

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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A17: 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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A18: What is going to happen to all the money saved?

The money is saved by each state’s national tax authorities, and it is up to individual governments to decide how it should be used.

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A19: 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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A20: 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.