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In advance of the tomorrow's (21st March) Budget, the Government has confirmed that the much talked about VAT "reverse charge" anti-MITC fraud measure will come into force on 1 June 2007.

The measure is an important part of the Government's strategy to tackle Missing Trader Intra-Community (MTIC) fraud. It will see a new VAT accounting system applied to mobile phones and computer chips, which are the goods most commonly used in the fraud. By removing the opportunity to steal VAT on business-to-business transactions, it will prevent MTIC fraud in those goods.

Under the reverse charge procedure, the supplier of the specified goods does not account for the VAT on their sales when selling to other VAT-registered businesses - instead it is the responsibility of the purchaser of the goods to account for the VAT. Provided that the purchaser has correctly done so, they can recover this VAT in the normal way. This means that HMRC is not put in a position where it may have to make repayments of VAT where the corresponding tax on the sale has not been paid to it.

The Government announced in January 2006 that it had sought a derogation to introduce the reverse charge, and legislation was included in Finance Act 2006, enabling the reverse charge to be implemented on agreement of the derogation. Businesses complained that they had very little time to prepare for the changes which were expected to go ahead last year.

New detailed guidance and draft legislation are expected shortly. The derogation covers two categories of goods:

• mobile telephones; and
• computer chips/microprocessors/central processing units.

At a summit hosted bt HMRC in February 2007, Paymaster General, Dawn Primarolo, addressed representatives from across the European Union, and stated that European Union law enforcement officers and tax authorities would be working together more closely to fight missing trader VAT fraud. MTIC is widely recognised as a problem throughout the EU.

The Government has put in place a comprehensive strategy for tackling MTIC fraud through a combination of legislation, litigation and operational activity - over 1,500 HMRC officers are deployed on tackling this fraud. This strategy is having a significant impact, and statistics published by the ONS, using estimates produced by HMRC, show that the trend of reduced levels of trading associated with MTIC fraud is continuing, with a substantial reduction in recent months.

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HMRC: New measure to tackle international VAT fraud

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