European VAT and Carousel Fraud

The EU-wide problem of Carousel Fraud

Carousel fraud is an increasing problem within the EU; in its simplest form, a company is set up to import goods from other EU member states – initially high value low volume goods such as mobile phones and computer chips have been the major commodities, but many other portable goods may also be used and the likelihood is that fraudsters will also target services where control problems are even more difficult.

Goods are supposedly bought ‘VAT free’ from a member state, then sold on with VAT added. The company then disappears without accounting to the tax authority for the VAT charged, and pockets the VAT due.

The ‘carousel’ part comes in when the same fraudsters continually re-import and export the same goods through a number of member states, reclaiming the VAT each time because the goods do not attract VAT when they cross an EU border. In many cases, the goods themselves don’t even physically exist; the transaction is based entirely on a fraudulent paper-trail.

Carousel Fraud and the European VAT system

The opportunity for carousel fraud is created by the way in which internal and cross-border VAT is governed and administered. The solution, as proposed by RTvat, requires two changes to existing VAT collection methods:

1. All VAT should be collected and accounted for at the time of settlement of the transaction, in ‘real time’, rather than on some future date from invoice.

2. All intra-EU transactions should have VAT collected by the seller, at the VAT rate and rules applicable to the buyer; where the buyer is VAT-registered in its country, the credit should be passed across through the two tax authorities, again in ‘real time’.

These changes will wipe out carousel fraud at a stroke and significantly reduce other VAT frauds, saving the EU up to €120 billion per annum which could be spent on a variety of projects to greatly benefit the lives of the citizens of EU member states.

The impact on merchants is generally very favourable; the high cost of preparing VAT returns is greatly reduced, as the merchant’s bank separates out the VAT at the time of the credit being made to its account. In the same way, when the merchant makes a payment for goods on which VAT is recoverable, the credit is received immediately.

The credit card model for eliminating VAT fraud

RTvat proposes the use of debit or credit cards for VAT-registered merchants to be used for all qualifying purchases. The correct VAT-adjusted amount would be credited to the buyer’s bank automatically as soon as the selling merchant submits the card settlement file.

In brief, this solution would require:

• Moving all VAT collection to ‘real time’ – payable at the time of settlement of the transaction.
• Giving similar ‘real time’ credits to VAT-registered buyers, so there is no overall cash flow disadvantage.
• Making all intra-EU international transactions to be subject to VAT at the rate of the buyer ’s country, with off-setting credit, for the same amount, directly to the buyer. This is in effect the definitive VAT regime which was foreseen in 1993 when border controls were abolished in the Community.
• Establishing a neural network for early identification and investigation of suspicious transactions by tax authorities and law enforcement.
• Setting up business debit cards, directly linked to VAT numbers for immediate claims, for ease of accounting for SMEs.
• Linking the 27 tax authorities, using sophisticated database software, to enable the smooth transfer of all intra-EU tax settlements.

The technology for such a solution exists and is in widespread use by the card associations, banks and processors; with sufficient political will it could be readily applied to stamp out the fraudsters and save the EU €325 million per day.

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