UK telecoms VAT fraud

The UK’s HMRC will introduce domestic VAT reverse charge measures on 1 February 2016 to combat VAT fraud in the wholesale telecoms markets. The measure, which withdraws the cash payment of VAT on B2B voice and data telecoms services, follows consultation with the industry where VAT fraud is suspected.

This is the latest industry sector to be hit by so called ‘missing trader’ or ‘carousel’ VAT fraud, which is estimated to cost the UK over €8 billion per annum.

HRMC introduces reverse charge on wholesale telecoms services

The new requirements will target wholesale voice telephone call routing and data services provided over both landline and mobile networks. The measure will impact major telecoms carriers who use platforms (‘carrier hotels’), such as Telehouse in London, to exchange international trade.

The domestic reverse charge switches the responsibility to report the VAT element of the transaction from the seller to the buyer.  The seller has no requirement to charge and pay the cash element of the output VAT - the buyer instead nets it off in their VAT return against their input VAT.

The UK Treasury is concerned that VAT fraud has now migrated into wholesale telecoms, and is deploying emergency measures approved by the EU. It is not yet clear how much fraud has already been committed, but the worry will be that prior losses in sectors such as laptops and computer tablets will be repeated.

Spread of €100bn EU VAT fraud

EU VAT fraud is estimated to cost the European Union member states over €100 billion per annum. The fraud arises from the requirement to not charge VAT on the B2B sales of goods or services. Criminal gangs have exploited this requirement by declaring fictitious sales as such VAT-free cross-border sales, but actually selling the services in-country with VAT. The gangs then pocket the VAT charged instead of paying over to the tax authorities.

Such ‘missing trader’ VAT fraud originally started over ten years ago in the computer chip, laptop and mobile phone sectors. It has since spread to carbon trading, precious metals, wholesale energy supplies and pharmaceuticals.

To help reduce missing trader fraud, in 2014 the European Commission permitted member states to apply zero VAT on industry sectors susceptible to missing trader fraud under a special 'Quick Reaction Mechanism'. This is known as the ‘domestic reverse charge’. It has significantly reduced the opportunities for fraud, but has encouraged criminal gangs to search out new sectors including the pharmaceutical industry.