Fraud: EU Committee Report
2 July 2007

In a debate on the report of the European Union Committee on Stopping the Carousel: Missing Trader Fraud in the European Union (20th Report, HL Paper 101). in the House of Lords on 2 July 2007 Lord Trimble said,

'My Lords, I rise also as a member of Sub-Committee A of the European Select Committee, but unlike those who have spoken already, I am a very recent member. This report was almost complete by the time I joined. In the few meetings that I had the pleasure of attending, it was a case of running hard to catch up with all the work that the other members had done. I echo the congratulations to the noble Baroness, Lady Cohen, for bringing together this extremely complex matter in this report and for the way in which she has explained the basic issues to the House tonight, issues which were taken up in the contributions by the two noble Lords who spoke afterwards.

'The report was published on 25 May, and just a month later a response, dated 25 June, came from Dawn Primarolo on behalf of the Government. Next to her letter is the official government response to the report. There is some progress in that response, although perhaps not as much as we would have liked. As has been mentioned, the Government acknowledge that we are dealing with a systemic problem:

“MTIC fraud is a sustained and organised criminal attack on the system that exploits a weakness in the VAT treatment of cross border trade in order to commit fraud”. 'That acknowledgement is hugely important. Clearly at the moment the Government are engaged in an enforcement exercise involving 1,500 staff and costing £95 million a year. However effective that enforcement effort may be at what it is focusing on at the moment, the more effective it is at focusing on that, the more the problem will shift elsewhere. There is a huge range of goods which are light, easily moved and of high value to which this fraud can attach. So if it is acknowledged that there is a systemic problem, the obvious answer is to look again at the system, as was acknowledged in evidence given to us on page 98 of our report. Mr Eland, speaking for HMRC, said:

“All I would like to say, speaking from an operational perspective if I may, is that yes, it is always the best solution to change the rules so that things cannot happen in the first place. Any enforcement activity is always going to be following on after the event or in response to a failure, if you like, of those rules, so getting the rules right, I agree, is obviously what we want to do”.

'I am delighted to hear that and to repeat what is in an abbreviated form in the main body of the report.

'It is now acknowledged that the rules have to change. We examined in the report and set out briefly in the final chapter the options for change. We looked first at a generalised reverse charge or sales tax, then at the origin system, then at a flat-rate origin system and then at the origin system or flat-rate origin system without clearing house—of course, clearing house was considered in that context as well. We deliberately did not recommend a single solution; clearly, individual members of the committee will lead in different directions on this. We were hoping for a detailed response from the Government to these options. There is a certain amount of disappointment on our part at the response received because it is so brief.

'The noble Baroness, Lady Cohen, expressed her view on a generalised reverse charge, which would be like a sales tax, and on the limitations of sales tax. One of the limitations of sales tax was outlined to us in a very stark way in the evidence we received, and I cannot resist the temptation to quote Mr Brown, from Her Majesty’s Treasury. He said:

“One of the reasons why more countries have been attracted by value added tax as opposed to sales tax is that the fractionated nature of the payment regime means that there is an element of self-policing within the tax system and that that basically provides you with greater taxing power than you would otherwise have. Very few of the sales taxes which operate get into double figures. We do see value added tax at rates of 20 per cent which appear to be sustainable”.

'That lays it out very simply, very clearly. If you go for a sales tax—which will eliminate missing trader intra-Community fraud completely and save billions of pounds—it will be difficult to persuade the consumer to pay a sales tax of 20-plus per cent, whereas with the fractionated VAT adding up from each transaction and collected in stages, the poor consumer ends up paying 20-plus per cent. He does not notice it so much, except perhaps when he wonders why consumer goods are so much cheaper across the Atlantic than they are here. Part of the reason—although not all of it—why things are cheaper is that they do not have VAT but they have a sales tax. There are other reasons, and I do not want to simplify a highly complicated matter, but I could not resist the temptation of sharing with your Lordships the Treasury’s very stark view of the disadvantages of a sales tax.

'In the Government’s response there is not, as I said, a detailed consideration of the options. We are, however, informed that:

“The UK and our European partners are looking at these radical approaches, and indeed the Commission is carrying out a study, due to report to the Council by the end of this year, on both the generalised reverse charge and the flat rate taxation of cross border trade with a clearing house system”.

'So two of the options that we mentioned are being discussed, and the Commission will report to the Council at the end of the year. I find this entirely unsatisfactory. There is within the United Kingdom a dissatisfaction with the way in which the European Community so often works. It appears to be beyond our reach and beyond our ability to influence. Things then appear over the horizon quite quickly and take the form of a diktat or directive in which we then find that we have very little say when it comes to legislating here. While I understand the reason for that view, I am not sure that it is always accurate. I find sometimes when one moves about Europe that there is greater openness within European institutions and processes than exists within our own process, and I think this is another case of that.

'The Treasury acknowledged in its response to us that it has a systemic problem. The obvious thing to do is to look at ways of curing that systemic problem, and to have a debate in which Members of this House and, through them, the public could become aware of what the problems and options are and could contribute. This is part of what we hoped we would generate by producing this report. We hoped that it would be a springboard for a debate, but the Treasury does not want a debate. It just mentions that there is an issue and says, “We will not talk about it until after we have consulted or completed a process that is taking place in Europe beyond our view and beyond our opportunity to influence. We will wait until the matter comes before the Council for a decision, then we will take whatever decision we think is appropriate and we will come back and tell you”.

'Maybe I am extrapolating unfairly from one case, but the real cause of dissatisfaction with the processes within Europe lies in how those processes are handled by our own Government, who do not consult properly their own people, representatives and Parliament but prefer to go to Europe, take a decision and then come back and tell us. That really is not good enough. Maybe I am exaggerating; but the Government, who themselves complain about what they say is the public’s inaccurate view about European processes, could provide for greater transparency. I look forward to the Minister, in his reply, meeting all the desires that I have expressed with regard to generating and carrying through a debate well in advance of any decision in the Council.'

To read the debate in full click here

2 July 2007

» Return to House of Lords section

Published by the Office of The Right Honourable The Lord Trimble, of Lisnagarvey in the County of Antrim.
Tel: 020 7219 3000 | Fax: 020 7219 5979 | Email: [email protected]