5.12 Budget Note CE 15/03, in its general
description of the measure, explained the effect as follows: "Where
a business receives a supply of specified goods or services in
circumstances where it knew or had reasonable grounds to suspect
that VAT on those goods or services would go unpaid, it would
be held liable for the tax due in the event of a default by the
On introduction, the measure would be restricted to certain specified
goods: telephones, parts and accessories, and computer equipment,
parts accessories and software.
However, as drafted there is power to change, by Treasury Order,
the designated goods or services to include different goods or
As regards safeguards to protect innocent traders, the Note states
"A statement of practice provides details of the measure,
explains what defences are available and provides guidance on
steps that businesses can take to reduce the risk of unwittingly
purchasing goods in an artificial supply chain".
5.13 Our witnesses
from the private sector expressed their misgivings that the provision
was so wide-ranging that it might catch ordinary commercial transactions
(QQ 50, 287 & 359). A particular concern was focussed on the
requirement, under subparagraph 2(b) of new section 77A of Part
4 of the Value Added Tax Act 1994 (c.23): "at the time of
supply the person knew or had reasonable grounds to suspect that
some or all of the VAT payable would go unpaid". In the view
of our witnesses, a wholly innocent trader might find himself
caught up in a supply chain, which, with hindsight, falls within
the Customs & Excise term of "artificial", but about
which he could not at the time of the transaction, have
any knowledge (Q136). One witness put the problem to us succinctly:
"Is it right that a trader should be liable for the VAT of
someone else in the supply chain of whose existence he is not
John Whiting, PricewaterhouseCoopers and Chartered Institute of
Taxation, suggested that requiring a trader to go "further
back down the trail and forward, because the way the provision
is drafted is as these goods move, that seems to us too much."
5.14 Given that we found universal acceptance
of the need to legislate to tackle the perceived fraud, we pressed
our witnesses to come up with their own suggestions for refining
the targeting of the measure, and improving the safeguards for
the innocent. Several witnesses proposed that one of the various
versions of the so-called "reverse charge on supply"
approach (otherwise known as a "self-supply charge")
should be adopted. Under this proposal, when making a purchase
of a VAT-able supply, the purchaser should pay the ex-VAT price
to the supplier, and himself account directly to Customs &
Excise for the VAT due. (In passing, they noted that had there
been any consultation exercise before the measure was published
in the Bill, they would have taken the opportunity to urge such
an approach.) One precedent of this type, dating from the 1980's
and quoted by more than one witness is that operating in the market
for gold (QQ 156, 236, 276, 372)..
Two other suggested variants were a system comparable to that
adopted in respect of imported services from overseas (Q 159),
and the "'Black Box' or terminal markets system", which
was described to us as applying within the terminal markets in
the City, in particular, the Metal Exchange. No VAT is said to
change hands where a transaction is between two members of the
same exchange. VAT is only charged when a metal is supplied to
somebody who is outside the Exchange (Q 160).
5.15 We put the
"reverse charge on supply" alternative to our witnesses
from HMCE. They told us that there were three arguments against
its adoption, which together they found compelling. First, it
would have to apply across the whole industry sector. They claimed
that this was unjustified because the domestic trade was far less
affected than the import-export trade: High Street retailers,
for example, are not affected by this type of fraud. Second, as
a practical matter, HMCE were not convinced that a "reverse
charge on supply" arrangement would be particularly effective
at combating the type of fraud being targeted: it would simply
push the fraud down to the far end of the chain. Third, to introduce
such a provision would involve first seeking a derogation from
the European Sixth VAT Directive (Q 767).
5.16 We accept, in the light of the evidence
of officials, that none of the variants of the "reverse charge
on supply" would work in the particular markets at which
Clause 18 is aimed. We recognise that these markets are not "closed"
and amenable to the tight degree of control that is available
in the specialised markets such as gold and the metal exchange
where such schemes have been adopted.
to other suggestions for improved safeguards by means of narrower
targeting, one witness contrasted the Clause 18 approach unfavourably
with the Netherlands counter-measures in respect of the missing
trader problem, adopted in 1995. He considered that, following
the Netherlands approach, the trigger for action under Clause
18 should be explicitly the risk of loss of VAT through fraud
(thus excluding bankruptcy or insolvency) (QQ 288 & 354).
Another witness suggested that the present Clause adopted a "scatter
gun" approach, treating in the same way someone who (a) was
himself committing the fraud, (b) was actively helping in committing
the fraud, (c) knew that the fraud was going on, but just kept
quiet and allowed it to happen, and (d) had no idea that the fraud
had happened. The proper target should be the person who was aware
of what was going on (QQ 368-370).
5.18 Tony Walker told us that HMCE had looked
closely at other countries' efforts to legislate to tackle missing
trader fraud, including in particular the Netherlands and Germany,
and had sought to draw on their practical experience. Their respective
laws had only become effective towards the end of 2002, so it
was still too early to tell how successful the measures had been.
He added that the draft UK legislation very closely mirrored the
Dutch legislation (Q 751).
5.19 Reverting to the issue of guidance
to help protect legitimate business, Mike Wells confirmed that
HMCE had received representations in the course of consultation
on their draft guidance document concerning genuine business failures
(the issue of insolvency). They planned to include further guidance
in the proposed Statement of Practice about the protection for
a legitimate trader, who could not reasonably be aware of the
insolvency of another trader in the chain. Several important changes
had already emerged as a result of consultation and the guidance
note would be fuller, in the light of feedback received (Q 770).
Tony Walker HMCE, filled in more details for us about the programme
of road shows for the industry sectors and their professional
advisers which had not only taken place as part of the consultation
exercise, but would continue. (Q 772).
5.20 We recognise the considerable educational
effort that is being undertaken by HMCE to provide help and guidance
for legitimate traders, in order not to find themselves through
inadvertence, becoming involved in an "artificial" supply
chain. However, we still have some misgivings that, as in the
case of Clause 17 (see paragraph 5.10) the protection afforded
to the legitimate trader by challenging the step of being made
jointly and severally liable for the unpaid net tax in a supply
chain only after the event would be insufficient. We acknowledge
that the procedure begins with a "Notification Letter".
The trader then has 21 days in which to demonstrate to HMCE a
legitimate reason. If he or she fails to do so, at the end of
that period a Demand Notice will be issued for the unpaid net
tax. But we still see the need to enhance the protection for a
legitimate trader from the burden of being faced with a "Notification
Letter" in the first place. The detailed arguments that we
advanced at paragraph 5.10 in respect of enhanced statutory protection
for the legitimate trader apply with equal force in the case of
5.21 We recommend
that consideration be given to providing that, before taking steps
to hold a trader liable under the joint and several liability
provisions of Clause 18, HMCE should be obliged to seek leave
from a Chairman of the VAT and Duties Tribunal. The application,
which should be approved by the Commissioners of Customs and Excise
themselves, without power of delegation, should be on an ex
parte basis. Before giving leave, the Tribunal Chairman
would have to be convinced by the HMCE case against the trader
that the business was involved or complicit in the alleged fraud.
5.22 Our witnesses
welcomed the consultative document "VAT Strategy: Joint &
several liability Consultation on reasonable checks" Customs
& Excise, April 2003. There was a degree of consensus that
the list of questions set out in Appendix 2 "to demonstrate
reasonable steps taken to ensure the integrity of supplies and
supplier", was appropriate, although Dennis Knowles suggested
that it would remove a great deal of anxiety if Customs &
Excise accepted that a trader who had correctly carried out proper
risk management procedures would not be caught (Q 59). In addition,
some concern was expressed about what paperwork would need to
be kept so as to demonstrate to Customs & Excise that such
steps had indeed been taken (QQ 151-155).
5.23 A more general concern was the principle
of being obliged to rely on the Customs & Excise interpretation
of their statement of practice for protection (Q 59).
Moreover, while a trader may rely on a statement for the purposes
of a current transaction, there is no procedure under which any
change in the statement as it applies to future transactions can
be challenged. Finally, some witnesses expressed concern at the
power taken to vary the categories of goods or services specified
by Treasury Order. As one witness put it, there could be a "creeping
widening" of the scope, without the degree of scrutiny that
primary legislation would receive (QQ 365, 577 & 619).
5.24 We are conscious that the public consultation
that was launched with publication of the HMCE draft document
in April 2003 was still under way as this Report was being prepared.
It ended on 10 June 2003, and HMCE told us that they hoped to
publish as soon as possible thereafter (Q 770). We assume
that the points that have been raised with us will have been put
directly to HMCE. If so, we hope that they will receive appropriate
consideration. In that hope, we confine ourselves to the following
5.25 Our view
is that concerns expressed to us by witnesses about the creeping
widening of the categories of goods or services specified by Treasury
Order should be much allayed if the system of enhanced safeguards
for the legitimate trader, which we have commended for consideration
above, is adopted.