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Fraud: EU Committee Report

My Lords, I join in congratulating the committee on its excellent and comprehensive report. It really is a top-class document. Estimates of the size of the fraud vary, but the report states that there is no evidence that the evasion rate is any higher for VAT than for other forms of tax. We should bear that in mind when looking at the problem, so that any remedies are proportionate. The report quite rightly states that matters cannot be left as they are and that something needs to be done. In her evidence, the right honourable Dawn Primarolo said that action taken so far had been effective in causing, "““a massive drop to the point where it is now minuscule””." Additionally, permission to derogate has now been received for the reverse charge for certain categories of goods. This will continue the downward pressure. Certainly, time should be spent on seeing how the steps already taken turn out. The derogation will have to be renegotiated in two years, giving an in-built date for reviewing the situation. Perhaps if the fraud has migrated to other countries, they will be more anxious to co-operate and may not—as on the occasion of asking for the present derogation—demand a pound of flesh in the form of the UK making further concessions on our rebate. The problems of mutation and migration will exist whatever happens, even if they appear in a different guise. It is the nature of taxation that there will always be people who seek to evade it. Inevitably, if one door closes, another will open. That may sound defeatist but it is not meant to be. It is an argument for giving the present steps a chance to work, and examining the results before making wholesale changes that may result in different sorts of fraud taking place. In the event that further changes need to be made, the end-user tax certainly merits a great deal of further consideration. I disagree with the statement that there will be an extra burden on the retailer in the case of an end-user tax. The retailer will still be selling the same quantity of goods, but instead of remitting to Her Majesty’s Revenue and Customs the VAT on goods sold, less the VAT he has paid to his supplier, he will simply send the VAT on the goods sold: one step fewer, administratively, than at present. Additionally, he will have an improved cash flow, as he will not have to finance VAT on the goods that he has purchased for resale. Administrative costs will be lower and the elimination of the chain would make fraud more difficult. That tax would be collected in one hit, rather than bit by bit, should be no objection, as that is how virtually all tax is collected. I support the arguments of Her Majesty’s Revenue and Customs against the origin system favoured by some noble Lords today. I will not repeat those arguments, but they should be listened to most seriously. I share the report’s concerns about potential hardship for businesses and enterprise, highlighted so eloquently both by my noble friend Lord Steinberg and the noble Lord, Lord Cobbold. It is clear from the evidence in the report that the extended verification system has created considerable difficulties for British companies. It is all very well for there to be a process whereby, in the case of hardship, delayed VAT repayments are made. I have no doubt that—and I say this from personal experience—Her Majesty’s Revenue and Customs will be sympathetic and helpful, but if security or bank guarantees are required for traders to receive delayed repayments, there will certainly be instances where security cannot be given. Companies facing hardship do not usually have surplus or unsecured assets. What happens then? Do they go under, as the noble Lord, Lord Cobbold, pointed out has already been happening? Add to that joint and several guarantees, and it becomes all too easy for the innocent to be swept up with the guilty. The comment by the Institute of Chartered Accountants, that joint and several guarantees would be difficult to enforce, completely misses the point. The combined effect of the cost of having to defend yourself if accused—however innocent you may be—and the untold stress and time taken up by defence and being many months in arrears on VAT payments, could easily bankrupt almost any business. One arrives at a situation where Her Majesty’s Revenue and Customs effectively has the discretion to put any but the strongest companies out of business. I hope that the application of reverse VAT will substantially change these problems for innocent traders, as they will not have had to finance VAT on purchases. That is another benefit of the end-user tax. If the Government are reluctant to look more closely at end-user tax, there is one simple solution to carousel fraud, which the Minister might like to ponder: make VAT payable between companies in different countries in the European Union, just as if they were all in the same country. It worked before 1992 with different rates of VAT, so there is no reason why it should not work now. A single market need not mean a single tax system. With one stroke—albeit from 27 different pens—carousel fraud would be eliminated.