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Fraud: EU Committee Report

My Lords, I put down my name to speak in this debate, but somehow it did not get on to the speakers’ list. I join in the debate as a member of the sub-committee under the exemplary chairmanship of the noble Baroness, Lady Cohen, and I would like to take this opportunity to thank our clerk and professional advisers and congratulate them on their outstanding work in the preparation of the report. I wish to focus briefly on what I believe are two important issues raised by the report. First, while we must acknowledge the success of the Government and HMRC in reducing the extent of missing trader fraud in the computer chip and mobile phone trade over the past two years, that has been offset by serious damage caused to legitimate traders in the sector, particularly small companies. Applications for VAT registration, for example, are now taking up to three months for approval, and worse still the process of ““extended verification”” that is used to check all claims for the refund of VAT are taking up to a year to process. Many small companies have suffered, and in one of many cases reported to us, a company had repayment claims of more than £8 million in VAT withheld for more than a year, and was forced into voluntary administration. Clearly the damage to legitimate business is an unsatisfactory situation and one that cannot be allowed to continue indefinitely. That brings me to the second important and related issue I wish to stress, one which has also been discussed by the other noble Lords in the debate. Both the extended verification process and the ““reverse charge”” derogation introduced on 1 June 2007 relate only to the mobile phone and computer chip businesses, and obviously only to UK trade. Clearly the fraud can be switched to other trades or even services, and to other member countries of the European Union, many of which are already experiencing the fraud. It is thus a European problem and the report urges the Government to start discussions with the European Commission and other member states, and to look more sympathetically at a radical change to the VAT system. In their response, the Government acknowledge that discussions are already taking place, and that the Commission is carrying out a study and is due to report to the Council by the end of this year. The Government insist that any change to the VAT system must fit three criteria: that the right tax ends up in the right place; that the potential for fraud and non-compliance is minimised; and that business is not overly burdened. Those are sensible criteria and the Government take the view that the report’s recommendation for a common, flat rate of 15 per cent on intra-Community trade with or without a clearing house is a possible solution, but would meet the three criteria only if accompanied by a clearing house. As I have said, this is a European problem and one that Europe must resolve. The report has certainly stimulated discussion and our committee will be monitoring progress with interest in the months to come.