Section 50: Vat - Extension of Reverse Charge Provisions to Supplies of Services
Summary
1.Section 50 is an anti-fraud measure which provides an enabling provision in the VAT Act 1994 (VATA) necessary to implement European Council Directive 2010/23/EU. That Directive permits the option of a “reverse charge” for VAT to be applied to supplies of emissions allowances. This section enables the reverse charge to be applied to supplies of services of a kind used in missing trader intra-community fraud (“MTIC fraud”).
Details of the Section
2.Subsection (1) amends subsections (1), (2), (6), (9) and (11) of section 55A of VATA. Section 55A permits a reverse charge to be applied to goods of a kind used in MTIC fraud. The supplies to which that section applies are specified by Treasury Order. The amendments enable that section to apply to supplies of services of a kind used in MTIC fraud in the same way as it already applies to supplies of goods.
3.Subsection (2) amends paragraph 2(3B) of Schedule 11 to VATA. Paragraphs 2(3A) and (3B) of that Schedule permit HM Revenue & Customs (HMRC) to impose additional reporting requirements in respect of supplies of goods to which section 55A applies. The amendment extends that power to supplies of services to which that section applies.
Background Note
4.A reverse charge means that the supplier of goods or services does not charge VAT on the supply, but the recipient must declare the VAT due on it. The recipient can also reclaim this VAT in the same way as if it had been paid to the supplier. The overall effect is that the reverse charge and reclaim cancel each other out and so no net VAT is actually paid to or reclaimed from HMRC, thus eliminating the prospect of VAT being obtained fraudulently by means of MTIC fraud.
5.The existing VAT provisions permit the application of a reverse charge to supplies of goods which are specified by Treasury order. A reverse charge has been applied to supplies of mobile telephones and computer “chips” to counteract the substantial VAT losses arising from MTIC fraud perpetrated by trading in those particular goods.
6.Around the middle of 2009, there was evidence of similar fraud occurring with trading in emissions allowances under the EU “cap and trade” Emissions Trading Scheme (EU-ETS). This evidence, together with the potential for rapid escalation of the fraud, led several countries, including the UK, to introduce urgent legislation to prevent it.
7.This was achieved in the UK by applying a zero-rate to these services as an interim measure pending the adoption of an EU legislative solution. UK law did not permit the use of a reverse charge for supplies of emissions allowances as these are services not goods. The EU legislative solution is for a reverse charge and the amendment to the VAT Act effected by this section enables it to be applied to emissions allowances. Although the description of services in the relevant secondary legislation will be restricted to emissions allowances at this time, the amendment will enable other services to be added should similar fraud surface for them.
8.The EU Directive which permits the reverse charge does not impose any additional reporting requirements for trade in emissions allowances. There is no intention to apply any extra reporting requirements for these trades. However, the amendment aligns the power to make additional reporting requirements for supplies of goods or services of a kind used in MTIC fraud. This may be required should other services be identified as being used for MTIC fraud.