From 1 February, VAT on wholesale telecommunications services will be the responsibility of the customer rather than the supplier, HMRC said.
This change to a 'reverse charge accounting mechanism' has been brought in to prevent what is called missing trader intra-community (MTIC) fraud, the tax body said.
In the UK, MTIC fraud involves criminals buying goods or services in another EU state, thereby not paying UK VAT, and selling it on with UK VAT added. They then do not pay that tax to the tax authority, but go 'missing' with the money, said tax expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com.
"The fraud was initially prevalent in sectors such as IT and mobile phones," Mellor-Clark said. "However, the criminals have moved to other asset classes including precious metals, power, gas and carbon emissions allowances, and HMRC says it has evidence that telecoms are now being targeted."
Under the new tax structure the fraudulent supplier is no longer paid VAT by its customers, "so to all intents and purposes, their chance to abscond without paying that tax is removed", Mellor-Clark said.
EU and UK legislation allows HMRC to identify certain goods and services as subject to the domestic reverse charge., Typically the reverse charge mechanism only occurs in cross border transactions, Mellor-Clark said.
The new rules will cover wholesale switched voice services, including VOIP; wholesale SMS and MMS services, such as push messages; wholesale 'over the top' telecoms services; SMS hubbing, and SMS and voice aggregator services, HMRC said.
"The services will only be caught when supplied in a wholesale context," Mellor-Clark said. "HMRC indicate that this means supplies in a business-to-business context. The purchasing business will intend to sell on the purchased services with little or no consumption itself."
Non-wholesale supplies will not be included, nor transport/capacity and related access services such as wholesale rental or lease lines, HMRC said.
'Indefeasible right of use' charges, which typically involve the operators of communications cables themselves, are also exempt, along with broadband- and data transmission-only services, and supplies to a member of a corporate group for onward supply and consumption within that group.
Suppliers will have to change their invoices to reflect the new rules, indicating that the domestic reverse charge applies and recipients should account for the VAT due. The amount of VAT due should be stated, but it must not be shown as due to the supplier, HMRC said.
HMRC said it recognises the difficulties of making these changes, and will adopt a "light touch" to enforcement for the first six months of the new rules. After that period penalties may be imposed for failure to implement the new rules, it said.
The changes are likely to be successful in reducing future fraud, Mellor-Clark said.
"However, our experience in other sectors suggests that HMRC will also be looking for ways to recover retrospective VAT loss," he said. "In particular, businesses in the sector should expect HMRC to look at VAT incurred and recovered on supplies received. It is common for HMRC to look at 'innocent' businesses in the supply chain and recover lost tax by denying recovery of VAT incurred on supplies."
"This is done on what is known as the Kittel principle, where HMRC will say that the business knew or should have known that the transactions in which it was involved were fraudulent," Mellor-Clark said. "It will also say that the business failed to take sufficient care to ensure the bona fides of its counterparties and suppliers. In such circumstances they can deny input tax recovery for the business and issue assessments to recover the tax."
These challenges are not limited to a business’s dealings with its immediate counterparties, but can concern transactions anywhere within the chain, Mellor-Clark said.
"Businesses facing such challenges would be well advised to seek advice in dealing with HMRC’s investigation into the transactions," he said.
"At the same time businesses may question why HMRC did not act sooner in relation to fraud in this sector. It would appear, from their dealings with some tax payers, that they had concerns some time ago. A more timely introduction of these measures may have reduced the criminals' opportunity to perpetrate the fraud," Mellor-Clark said.