Member States are currently under a severe threat from fraudsters who take advantage of the EU VAT system. The VAT gap – the difference between the amount of VAT that is forecast to be collectable by the Member States and the amount that is actually collected – runs to many billions of Euros. For trade in certain goods, Member States are currently entitled to designate the purchaser as the entity obliged to pay the VAT due on the transaction. The system is known as the reverse charge mechanism and it is now used for most B2B transactions for intra EU supplies of services. Following a recent ECOFIN meeting, we understand that the Czech Finance Minister - Andrej Babis is claiming that the EU Commission has agreed to an extension to the reverse charge mechanism to cover all supplies of goods. The Commission has, apparently, agreed to introduce legislation to implement a generalised reverse charge system by as soon as the end of 2016. This would constitute a change of heart by the Commission which has previously opposed such a move. However, we understand that Mr Babis threatened to veto other measures aimed at combating corporate tax avoidance. The quid pro quo for his co-operation was the Commissions agreement to the introduction of the generalised reverse charge system. Comment – The Commission is anxious to reduce the level of VAT fraud with the EU. Indeed, it states as much in its recent 'Action Plan for VAT'. Businesses involved in selling goods will wish to keep an eye on these developments as their VAT reporting and accounting systems will need to be re-configured.

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Summary
One of the main problems of the
current VAT system within the EU
is the propensity for VAT fraud.
Businesses generally charge and
collect VAT on supplies of goods or
services made to other businesses
and fraudsters will then simply
'disappear' without paying the VAT
collected onto the relevant tax
authority.
To combat such fraud, Member
States are currently entitled to
subject certain supplies of goods to
a system known as the reverse
charge mechanism. Under the
system, it is the purchaser's
responsibility to account for the
supplier's output VAT obligation
which significantly diminishes the
opportunity for VAT fraud.
30 June 2016
Reverse Charge Mechanism
Member States are currently under a severe threat from fraudsters who take advantage
of the EU VAT system. The VAT gap – the difference between the amount of VAT
that is forecast to be collectable by the Member States and the amount that is actually
collected – runs to many billions of Euros.
For trade in certain goods, Member States are currently entitled to designate the
purchaser as the entity obliged to pay the VAT due on the transaction. The system is
known as the reverse charge mechanism and it is now used for most B2B transactions
for intra EU supplies of services.
Following a recent ECOFIN meeting, we understand that the Czech Finance Minister -
Andrej Babis is claiming that the EU Commission has agreed to an extension to the
reverse charge mechanism to cover all supplies of goods. The Commission has,
apparently, agreed to introduce legislation to implement a generalised reverse charge
system by as soon as the end of 2016. This would constitute a change of heart by the
Commission which has previously opposed such a move.
However, we understand that Mr Babis threatened to veto other measures aimed at
combating corporate tax avoidance. The quid pro quo for his co-operation was the
Commissions agreement to the introduction of the generalised reverse charge system.
Comment – The Commission is anxious to reduce the level of VAT fraud with
the EU. Indeed, it states as much in its recent 'Action Plan for VAT'. Businesses
involved in selling goods will wish to keep an eye on these developments as their
VAT reporting and accounting systems will need to be re-configured.
EU agrees to a generalised system of VAT
reverse charge
VAT Alert
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556