Dispatch (UK/ROW version)
| by Paul Gosling 21 Jul 2006 Topic: News |
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fraud provokes crisis for VAT system The European Commission is pushing ahead with plans to fight missing trader fraud (MTF), which is now estimated to be accounting for more than 10% of UK exports. Across the European Union the cost is about 60bn euros a year, and taken with other forms of tax and excise fraud, European governments are losing between 200bn euros and 250bn euros a year. The scale and the damage of the problem have forced the Commission to propose ad hoc solutions, which officials acknowledge damage the integrity and coherence of the VAT tax system. As an emergency measure, EU member states will be permitted to operate “reverse charges” for VAT in certain circumstances, so that only the final transaction in the supply chain will be subject to VAT. Reverse charging is being permitted for the supply of goods particularly prone to VAT fraud - primarily mobile phones and computer chips. Under MTF, rogue businesses buy goods from overseas at nil-rate VAT, sell the goods VAT-inclusive, then disappear without repaying the VAT to the government. A refinement of this crime, carousel fraud, has the same goods repeatedly exported and imported, with a government liable to pay VAT refunds to the fraudulent trader. The UK Government has led efforts in the EU to obtain permission for reverse charging reducing the risk of it being the victim of carousel fraud. But this concession, which has now been agreed by a meeting of European finance ministers, runs counter to long-term reforms of VAT proposed by the European Commissioner for taxation, László Kovács, who wants the place of taxation of services to be where they are consumed. The Commission is worried by internal competition within the EU from countries with low rates of VAT - particularly Luxembourg, though the same problems afflict the UK from the Channel Islands. Proposals for tackling this remain on the table, as any solution requires unanimity which seems unlikely to be achieved in the short-term. One Commission official, speaking anonymously to accounting & business, said: “The VAT system we have today has thousands of problems and loopholes.” Thousands of family trusts are to escape new trust taxation measures announced in the Budget, the UK Treasury has announced. The move represents a climbdown by the Chancellor under pressure from the accountancy and legal professions. The Chartered Institute of Taxation (CIOT) gave a limited welcome to the move. John Whiting, chairman of the CIOT’s Tax Policy Sub-Committee, said: “It is good that the Government has listened to the arguments that we and the other professional bodies have been consistently putting forward since these misguided proposals were announced. Many of the anxieties and uncertainties that ordinary people have been experiencing since Budget Day could have been avoided if the Government had consulted on this in advance. People were put in the completely unacceptable position that they did not know the IHT [inheritance tax] that would affect their estates if they died after 21 March. The changes affecting deaths could have been delayed to allow for proper consultation and we very much hope this mistake will not be repeated.” The Institute regards four types of trust as affected by the Budget, where they are used for family planning purposes, not tax avoidance. These are: trusts created on the death of the first spouse for a surviving spouse; Accumulation and Maintenance trusts, typically holding property until young people reach the age of 25; trusts used to direct where property should go on breakdown of marriage; and self-settlements by vulnerable people and for the protection of disabled people. The amendments fail to put right the tax treatment of trusts that direct where property goes following a marriage breakdown and only partially resolve the problems created regarding Accumulation and Maintenance trusts, in the opinion of the Institute. “We now need the Government to show [it has] listened to all of our arguments about the defects in these proposals, and to make similar changes to the proposals as they affect divorce,” said Whiting. campaign launched against tax return deadline change Proposals to bring forward the deadline for self assessment returns are being vigorously opposed by ACCA, other accountancy institutions and small firms’ representative bodies. A review of HM Revenue & Customs’ (HMRC) on-line services, led by Lord Carter, recommended bringing forward self assessment filing dates from 31 January to 30 September for paper returns and 30 November for on-line returns, as from 2008. The Chancellor accepted the recommendations in this year’s Budget and agreed to implement them without consultation with the accountancy profession or other interested parties. ACCA, with other professional institutions, is lobbying against the move and has held discussions with HMRC and the Treasury. Research conducted jointly by the institutions concluded that the change will increase paperwork and costs, because earlier deadlines will require submissions to normally use provisional figures and estimates, for subsequent manual correction. HMRC’s costs will also rise because of the need for it to increase manual interventions. Collection of third-party data will not be possible in many cases inside the new deadlines. In many instances it will not be possible to prepare self-employed accounts early enough to allow completion of tax returns by the proposed deadlines. Staffing will become a serious problem for accountancy firms during the tax return season. Chas Roy-Chowdhury, ACCA’s head of taxation, said: “The professional bodies’ conclusion from this joint research is that Carter’s proposal is not in the public interest.” He added that a survey of ACCA members reinforced concerns about likely increases in administrative costs. The Federation of Small Businesses (FSB) is also strongly opposed to the change. Neil Hamper, FSB’s national tax spokesman, said: “In the Budget the Chancellor accepted Carter’s recommendations without any consultation. This unilateral change of tax return dates, with no consultation or consideration of industry views, will create chaos in the short-term. This creates a shorter period in which to gather up information to complete tax returns. For small firms who submit their own returns, this will increase the pressure on them. For those that use accountants it will increase the cost of doing so, as their service provider will have to take on temporary staff to handle the increased workload. Either way, it will cause serious difficulties for small firms and accountants. We call on the Government to re-visit [its] decision to implement Carter without consultation or consideration of the practical impacts that this will have on small businesses and the accountancy profession.” Treasury attacks tax avoidance schemes The UK Chancellor, Gordon Brown, has again shown his determination to eradicate what he regards as tax avoidance schemes. Latest moves include removing tax reliefs on some structured finance deals and debt-factoring arrangements. Further amendments are to be made to the Finance Bill, which is currently going through Parliament, to prevent companies obtaining tax relief on the capital as well as the interest on some loans obtained through structured finance deals. Some City analysts predicted this could be the first of a series of moves undermining structured finance institutions and their use of tax reliefs. The deals initially targeted by the Treasury are similar to factoring contracts, in that companies transfer ownership of a debt to a bank in return for the promise of a future income. In future, these arrangements will be taxed as if they are straightforward loans. HM Revenue & Customs says that these deals are most likely to be used by property companies. It has agreed to hold an “open day” to discuss the implications of the crackdown with companies and their advisers, and to prevent innocent financial arrangements being covered by the new legislation. A coalition of more than 300 charities has launched a campaign seeking the abandonment of the International Accounting Standards Board’s (IASB) exposure draft on segmental reporting (ED 8). The groups argue that the effect of the exposure draft would be to reduce the transparency of reporting by multi-nationals. The coalition, operating under the slogan “Publish What You Pay”, argues that the IASB’s proposal for reporting activity and tax payments on a business segment basis should be in addition to reporting on a country-by-country basis, not instead of it as the IASB proposes. Henry Parham, international co-ordinator of Publish What You Pay, says: “Accountability of corporations is vital if we’re to also hold governments to account for what they do with the cash they receive. That’s why we’re asking for disclosure of information that is vital for the stakeholders of all corporations.” Publish What You Pay argues that ED 8 would have the opposite effect of that intended by IFRS of improving the quality and transparency of companies’ accounts. One result, says the coalition, would be that it would become even more difficult to trace improper payments to corrupt governments and officials. Richard Murphy, the accountant who is the main author of Publish What You Pay’s submission, says: “What we’re asking for is information on where a company operates, what it is called in each country in which it works, what its sales in that country are on an intra-group and third-party basis, how much value it adds to the local economy, what its profits are and how much tax it pays. All multi-national companies already know this information for tax purposes so we’re not adding to the burdens on business. But we are adding vital decision-useful information for an enormous range of stakeholders who use accounts to appraise their engagement with corporations.” The Publish What You Pay coalition includes Transparency International, Oxfam, Save the Children, Friends of the Earth and Christian Aid. It has also requested the IASB to engage with it on an ongoing basis to improve the transparency of multi-nationals’ accounts. services directive gets go-ahead The EU is to go-ahead with its controversial services directive, despite mass protests in some parts of the EU. Commission officials believe that the directive will open up services, including accounting and consultancy, to more open competition within the EU. At present, only 20% of cross-border EU transactions are in the service sector, despite being responsible for 60%-70% of EU output. A services directive has been highly contentious because, while it is favoured by new member states, it is opposed by many interest groups in the more established member states, which fear that it will increase the economic and employment drift eastwards within the EU. The final measure was approved by all member states, except Lithuania, which believes the endorsed form of the directive is too weak. It was also criticised by Unice, the European business lobby group, as imperfect. Under the revised and approved draft directive, member states will no longer be permitted to insist on irrelevant requirements, such as an office in their member state in order to trade there. Governments will be required to review all existing law to consider whether it represents an unfair block on the free trade of services, and they will have to establish electronic one-stop shops for the registration of service providers from other member states. But member states can continue to demand that people working in their country must abide by its minimum standards on such matters as pay, security, environmental protection and health and safety. The agreement was welcomed by the Internal Markets and Services Commissioner, Charlie McCreevy, who acknowledged that the internal market for services is not working effectively. “A year ago, the controversy surrounding the Commission’s proposal for a services directive made us all believe that the prospects for reaching an agreement and adopting the proposal were extremely far off,” he said. “Given the heated political debates, press articles and even protests in the streets, anyone inclined to betting would have got very long odds indeed on the possibility of arriving at a compromise.” Commissioner McCreevy suggested that, despite the front-page protests, behind the scenes there was near unanimity by member states of the scale and cause of the problems holding back cross-border service transactions. That had now been reflected in the agreement of a way forward. “From being a huge liability, the services directive has been turned into a positive contribution to the EU’s future,” said the Commissioner. in brief...
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