Called the 'reverse charge', the measure is part of the Government's wider strategy to tackle Missing Trader Intra-Community (MTIC) fraud. By removing the opportunity to steal VAT on business-to-business transactions the Government says it will prevent VAT fraud in those goods.
MTIC fraud is committed by obtaining VAT registration to acquire goods VAT free from other Member States. The fraudsters then sell on the goods at VAT inclusive prices and disappear without paying over the VAT paid by their customers to the tax authorities.
A variant of MTIC fraud known as carousel fraud occurs when goods that have been imported into the UK are sold through a series of transactions before being re-exported to another EU Member State. They may then be re-imported back into the UK.
The fraud usually involves mobile phones or computer chips.
Paymaster General Dawn Primarolo MP said: "We are targeting the measure at the goods most commonly used in the fraud. This is a proportionate step to safeguard taxpayers' money, and means that businesses can trade in these goods without the risk of getting caught up in the fraud."
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.
HMRC has committed 700 additional staff, and now uses over 1500 staff to identify and tackle carousel fraud and those involved in it.
In recent months HMRC has focused efforts on denying the fraudsters access to the proceeds of their crimes, including through checking VAT repayment claims from those trading in supply chains associated with MTIC fraud. As a result the level of trading associated with attempted fraud has fallen significantly in recent months, according to HMRC.
The Government announced in January 2006 that it had sought a derogation to introduce the reverse charge, and legislation was included in last year's Finance Act, enabling the reverse charge to be implemented on agreement of the derogation.
HMRC will shortly issue detailed guidance and draft legislation.