This change has been introduced to help combat Missing Trader Intra-Community (MTIC) fraud, widely acknowledged as a large scale criminal attack on the EU VAT system. The fraud involves establishing a contrived chain of transactions both inside and outside the UK, solely for the purposes of creating large VAT liabilities which go unpaid because the supplier ‘goes missing’. 

Implementation of the ‘reverse charge’ results in the customer assuming the responsibility for accounting for VAT to HMRC, rather than the supplier, thus removing the ability of a ‘missing trader’ to steal VAT.

From June 1, 2007:

• VAT must not be charged on the sale of mobile phones and computer chips to VAT registered businesses. Mobile phones include other devices such as Blackberrys but not phones supplied under pay-as-you-go contracts;
• The customer will account for VAT on the supply on his own VAT return as a ‘reverse charge’.  The VAT can be claimed as input tax on the same VAT return subject to the normal partial exemption rules;
• The supplier must take steps to determine whether the customer is a VAT registered business or not intending to use the goods for business purposes;
• The reverse charge only applies to transactions with a VAT exclusive value of £5,000 or more.  The £5,000 de minimis limit applies at the invoice level;
• When selling goods under the ‘reverse charge’, the seller must include a statement on the invoice that the purchaser has to account for the VAT. The VAT amount must not be shown as VAT charged;
• Sellers must notify HMRC and submit a Reverse Charge Sales List (RCSL). This must be completed by the end of the month following the VAT period showing the customer’s VAT registration number and the total value of the reverse charge supplies made in each calendar month to that customer.

 HMRC have published a useful and detailed Information Sheet (8/07) covering a large number of practical issues and this is available on their website.

This is a major change to the VAT system potentially affecting a large number of taxpayers.  It applies even when the goods originate within the UK without an initial acquisition of the goods from abroad, normally a hallmark of the fraud.  The accounting systems of businesses will need to be adapted to enable normal VAT accounting to be suspended for these supplies, and to comply with the new regulations, whether they are a seller or a buyer.

Penalties for failing to comply with the new rules have been introduced, but HMRC have said that they will apply a ‘light touch’ during the initial six months for basic errors whilst businesses familiarise themselves with them. However we cannot expect this to be extended given HMRC’s determination that this fraud should be stamped out.

If you require any help with understanding the new rules please contact Tony Jackson or Amy Waterhouse.

Tony Jackson
Director of VAT Services
tonyjackson@shawtax.co.uk

Editors Note: Tony was the specialist adviser to the House of Lords EU Sub-Committee A for their Enquiry into Carousel Fraud.  Their Report “Stopping the Carousel: Missing Trader Fraud in the EU” was published on May 25, 2007 as HL Paper 101 and can be accessed via their website www.parliament.uk/parliamentary_committees/s_comm_a.cfm.