Reverse charge
Missing trader intra-community fraud is estimated to have cost between £1.12 billion and £1.9 billion in 2004-05. As announced on 26 January 2006, the Government has submitted an application to the European Commission for a derogation from the Sixth Directive to change the normal VAT accounting rules for supplies of certain specified goods, i.e. the reverse charge.
Reverse charge
Missing trader intra-community fraud is estimated to have cost between £1.12 billion and £1.9 billion in 2004-05. As announced on 26 January 2006, the Government has submitted an application to the European Commission for a derogation from the Sixth Directive to change the normal VAT accounting rules for supplies of certain specified goods, i.e. the reverse charge.
The reverse charge will only apply to sales within the UK where specified goods are purchased by a VAT-registered business for business purposes; sales to non-business customers are unaffected by the change, and normal VAT rules continue to apply. The relevant goods will be specified in detail, in draft UK legislation, before the reverse charge is introduced, hoped to be in October 2006.
Under the reverse charge procedure, the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. The supplier will not charge VAT, but will have to specify on the invoice that the reverse charge applies. Provided that the purchaser has correctly accounted for the VAT under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules.
In order to minimise the impact of VAT-registered customers on retailers, there will be a de minimis limit of £1,000, exclusive of VAT, below which the reverse charge will not apply. Normal VAT accounting rules will apply to transactions below this limit. Measures will prevent manipulation of this limit.
Suppliers will have to submit a reverse charge sales list to HMRC listing customer and transaction details where the reverse charge has been applied.
Before deciding not to account for VAT on the sale of goods, the seller will be required to take reasonable steps to establish that the reverse charge should apply, i.e. that the purchaser is registered for VAT and is intending to use the goods for a business purpose. However, a supplier who has taken such reasonable steps will not be required to account for VAT if his customer fails to apply the reverse charge. Similarly where VAT has been charged erroneously, penalties will not be applied unless there has been a tax loss.
Primary legislation in this year's Finance Bill will be brought into force by Treasury Order once the derogation has been approved. The goods to which the reverse charge will apply will be specified in that secondary legislation, as will any exceptions, such as transactions below the de minimis limit. Consequential knock-on effects in other areas of the tax will also be addressed at that time.
HMRC strongly recommend that businesses start making the preparations necessary for changing their VAT accounting systems on the basis of a possible October start date. HMRC is holding a series of discussions on implementing the legislation on 3, 8 and 9 August at 100 Parliament Street. Businesses or advisers wishing to attend should notify HMRC by 28 July using either address below. Written comments or queries should be submitted by 31 August 2006. Contact the VAT Fraud Team, Room 3/55, 100 Parliament Street, London SW1A 2BQ; e-mail: antivatfraud@hmrc.gsi.gov.uk.
Business Brief 10/06 dated 19 July 2006
