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Further Attempts to Unify EU Fraud Investigations

28 July 2010

As a follow-up to the agreement to enable VAT investigators to conduct cross-border enquiries more swiftly and effectively, which was ratified on 16 March 2010, the Council of the European Union, in June, agreed on a draft regulation which, when finalised, will bring the prospect of a European-wide VAT investigation force a step closer.

Back in March, the Council ratified measures which, provided all of the Member States co-operate fully with one another (which, of course, is by no means a certainty), will result in the streamlining and extension of the scope of the existing Mutual Assistance provisions. It will be far easier for investigators from one EU Member State to conduct enquiries in another, and – at least potentially – a VAT Officer from the UK could personally carry out verification enquiries in another Member State with the assistance of his or her overseas colleagues. Furthermore, included in the March Directive are provisions which would enable one Member State to seek recovery of a VAT debt in another.

As the system presently operates, it can take up to three months for a Mutual Assistance request to be authorised and carried out – a fact which has caused untold frustration to many traders awaiting decisions on what are often VAT repayments in the hundreds of thousands, or even millions of pounds, and is often used by HMRC as justification for the refusal to issue decisions to frustrated traders awaiting the release of their VAT repayment claims.

On 8 June, the Council reached agreement on the creation of a new EU-wide network of fraud detection officers – to be known as ‘Eurofisc’. The Eurofisc network will consist of specially trained VAT investigations Officers stationed in each Member State – whether they will be centrally or regionally based is, as yet, unclear.

The job of these Officers will be to detect and combat new cases of cross-border fraud. Although it is not explicitly stated in the European Council Press Release which announced this new measure, it is probably safe to assume that the bulk of the Eurofisc Officers’ duties will focus on detecting and combating Missing Trader Intra-Community (‘MTIC’) VAT fraud, which is without doubt the single greatest cross-border fraud currently facing the EU.

When viewed alongside the new cross-border co-operation measure announced in March, it must be a distinct possibility that, in the future, a trader may be confronted with, for example, a German Eurofisc Officer arriving on the doorstep in the company of a number of his UK counterparts in order to investigate a VAT MTIC fraud, and seek recovery of a VAT debt which may, in fact, be due in Germany.

The drafting of these new EU regulations is the strongest indication yet that the EU is now fully alive to the huge fiscal dangers posed by MTIC fraudsters, who often operate and reside in countries remote from the fraudulent businesses which they control. At a time in which the entire Eurozone’s economy is under pressure, national Governments are under immense pressure to reduce deficits and increase their tax yields, and the timing of these new measures must be more than mere coincidence.

Many will view these developments with a degree of alarm and, indeed, there is no doubt that such measures – unless rigidly controlled by a strict set of checks and balances – could lead to the possibility of a completely innocent UK trader having his VAT repayments withheld pending the resolution of an investigation into a fraud in a completely different country – thereby potentially taking the delays caused by the current extended verification policies to a whole new level.

The prospect of a Europe-wide enforcement agency targeting traders and investigating frauds in numerous legal jurisdictions is one which it is not pleasant to contemplate, and the European Council has, to date, been silent as to the specifics of the regulatory procedures which it would impose upon the Eurofisc network in order to avoid the potential for innocent businesses to become caught up in costly, lengthy litigation – perhaps largely conducted in another country with a wholly different legal system.

The danger of such an outcome will, however, be counter-balanced by the proposed extension of the reverse charging system throughout the EU as it applies to certain types of goods commonly associated with MTIC frauds. Furthermore, there has long been an emphasis in European law – far more so than in the UK – upon the principle that a trader can and should only be held accountable for the VAT losses occasioned by another, fraudulent, party if it can be shown that he was seized of knowledge of, or was a direct and knowing participant in, that fraud.

The power to recover all or part of a debt due in another Member State from, for example, a UK-based trader has been a part of the Mutual Assistance provisions since 2008 – but, until now, it had only applied to certain customs duties and other levies, not VAT associated with MTIC frauds. With the proposed Eurofisc network will come another measure which has traditionally been associated with excise matters rather than VAT – namely, an ‘early warning system’.

Once again, there are few specific details as to how this system would work in practice, but it may very well be that a trader in, say, France who intends to sell particular types of goods to a business in Germany would be required to notify his local Eurofisc Officer in advance of the deal being completed. However, as with so many of the procedural changes proposed by the European Council, we must ‘watch this space’.

The proposed Eurofisc network is yet further evidence of the growing tendency for the taxation authorities – including HMRC – to move away from seeking to investigate MTIC fraud from a predominantly supplier-based perspective. More and more frequently these days, the approach is one of examining the entire chain of transactions – both at home and abroad.

The Kittel principle of ‘means of knowledge’ is now being applied to companies throughout the transaction chains, and UK traders can no longer sit back and anticipate the standard case on fraud from HMRC. They need to move away from their traditional focus upon a series of UK-based due diligence procedures. HMRC will seek to allege complicity in a fraud wherever that fraud may be.

With the aid of the streamlined and enhanced Mutual Assistance procedures, and with a multi-national, cross-border network of VAT investigators at their disposal, HMRC will, in future MTIC cases, be seeking to broaden the overall investigative remit associated with such cases, and safeguards must be put in place against becoming involved in frauds overseas as well as those here at home.

The dangers of becoming caught up in MTIC fraud are greater than ever, and businesses need to give urgent and serious consideration to making their overseas checks every bit as thorough and comprehensive as those within the UK.

Don Mavin
Head of Customs Investigations & Litigation

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Author: Don Mavin

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