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Business Brief 10/06

HMRC Reference: BB 10/06: 19 July 2006

1. VAT: Implementation of changes to VAT accounting rules (‘reverse charge’) for businesses trading in mobile telephones, computer chips and certain other goods; and further consultation with affected businesses

Who needs to read this?

Businesses buying and selling any of the following goods:

  • mobile telephones
  • computer chips/microprocessors/central processing units
  • electronic storage medium which may be used in, or in connection with, computers, or any device in categories 1 and 4
  • electronic devices used for the storage, processing or recording of electronic data as follows:

a) handheld devices for recording or playing of sound and or images

b) handheld computers

c) handheld communication devices other than mobile telephones

d) positional determination devices for GPS system

e) games consoles with screen, or of a kind used with a television or computer


Missing trader intra-community (MTIC) fraud, also known as carousel fraud, is a sophisticated criminal attack on the UK VAT system, which in 2004/05 is estimated to have cost between £1.12 and £1.9bn. The fraud is largely perpetrated using goods such as mobile phones and computer chips, but also includes other electronic goods. It involves goods imported VAT-free from other EU Member States being sold through contrived business-to-business transaction chains in the UK, and subsequently exported. The tax loss occurs when the VAT charged on the initial sale of the goods in the UK is not paid to HMRC because the seller disappears. The purchaser can still reclaim the VAT, so the loss crystallises when the trader who exports the goods from the UK makes a repayment claim. Where the reverse charge applies, the seller no longer has to account for VAT to HMRC, so it will remove the opportunity to steal the VAT in business-to-business transactions within the UK.

EU Derogation

As announced on 26 January 2006, the Government has submitted an application to the European Commission for a derogation from the 6th VAT Directive to change the normal VAT accounting rules for supplies of certain specified goods, listed above. This change of accounting provision is known as the ‘reverse charge’. This is an important part of a wider strategy designed to combat MTIC fraud.

The Government understands that the Commission is in the process of preparing a proposal to give effect to the derogation, which would need unanimous agreement by Member States before coming into force. The Government will want to implement the reverse charge as soon as possible after that agreement has been reached.

When will the reverse charge apply?

The reverse charge will only apply to sales within the UK where specified goods are purchased by a VAT-registered business for business purposes – sales to non-business customers are unaffected by the change, and normal VAT rules continue to apply. The relevant goods fall within the list mentioned above and will be specified in detail, in draft UK legislation, before the reverse charge is introduced. More detail on the precise scope will be available later over the summer.

How will the reverse charge work?

Under the reverse charge procedure, the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. The supplier will not charge VAT, but will have to specify on the invoice that the reverse charge applies. Provided that the purchaser has correctly accounted for the VAT under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules.

Will it apply to all transactions in these goods?

In order to minimise the impact of VAT-registered customers on retailers, there will be a de minimis limit of £1000, exclusive of VAT, below which the reverse charge will not apply. Normal VAT accounting rules will apply to transactions below this limit. There will be measures to prevent manipulation of this de minimis limit.

Will there be any special requirements to report transactions?

In order to enable HMRC to ensure that the reverse charge mechanism does not lead to any new revenue losses, there will be a requirement for suppliers to submit a reverse charge sales list to HMRC (similar to EC Sales Lists) listing customer and transaction details where the reverse charge has been applied. The exact details of this reporting requirement will be set out in secondary legislation and will be informed by discussions with businesses over the summer period.

How will business know whether to apply the reverse charge?

Before deciding not to account for VAT on the sale of goods, the seller will be required to take reasonable steps to establish that the reverse charge should apply, i.e. that the purchaser is registered for VAT and is intending to use the goods for a business purpose. However, a supplier who has taken such reasonable steps will not be required to account for VAT if his customer fails to apply the reverse charge. Similarly where VAT has been charged erroneously, penalties will not be applied unless there has been a tax loss.


At this stage, it is difficult to give an exact date for the introduction of the reverse charge, as the necessary EU procedures for approving the UK’s derogation do not have fixed time limits. However, we hope to be in a position to implement this before the end of the year. This could be as early as October 2006, but is dependent on progress within the EU.

HMRC is committed to an open dialogue with affected businesses over the coming months. This Business Brief provides an outline of the derogation request and how and when it will be implemented.

Primary legislation in this year’s Finance Bill will be brought into force by Treasury Order once the derogation has been approved. The goods to which the reverse charge will apply will be specified in that secondary legislation, as will any exceptions such as transactions below the de minimis limit. Consequential knock-on effects in other areas of the tax will also be addressed at that time.

Further information on the reverse charge and the timing of its introduction, as well as the draft secondary legislation, will be shared with affected businesses and advisers, as soon as they are available.

What this means for affected businesses and business consultation

HMRC strongly recommend that businesses start making the preparations necessary for changing their VAT accounting systems on the basis of a possible October start date. We recognise that this may be difficult without more details of the specific goods affected and how the reverse charge will work in practice. However, we are committed to working closely with the affected business sectors and interested tax professionals to support the effective implementation of the reverse charge.

To this end, HMRC is intensifying the dialogue and consultation with interested parties. We therefore intend holding a series of discussions on implementing the legislation on Thursday 3, Tuesday 8 and Wednesday 9 August at 100 Parliament Street. If businesses or advisers wish to attend, please notify us by 28 July using either address below. Alternatively if you would prefer to send written comments or queries, then please send them to either address below (by no later than 31 August 2006).

HMRC contact: write to the VAT Fraud Team, Room 3/55, 100 Parliament Street, London SW1A 2BQ; or email: .

Further information

For further information and advice, please contact HM Revenue & Customs’ National Advice Service on 0845 010 9000.

The views expressed in this Business Brief are those of HM Revenue & Customs.


HM Revenue & Customs Press Office, Room 2C/07, 100 Parliament Street, London, SW1A 2BQ. TEL: 020 7147 0798 / 2324 / 2328. To contact the duty press officer out of hours please telephone 07860 359544.


For general enquiries please contact HM Revenue & Customs’ National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website:

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