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VAT Frauds in the European Union: The Reverse Charge Mechanism, Joint and Several Liability and the “Knowledge Test”

Ludviksson, Ludvik LU (2012) HARN60 20121
Department of Business Law
Abstract
Summary
The EU and the Member States are concerned about VAT fraud and they consider it necessary to reduce the gap the VAT fraud makes. The purpose of this thesis is to describe three methods that are used in the fight against VAT fraud. Those methods are the reverse charge mechanism, joint and several liability and the knowledge test. Those methods are described, defined how they are used and what are the pros and the cons that follow them.

The VAT fraud can be miscellaneous but it is helpful to categories them in two main categories: Black marked fraud and MTIC fraud. Carousel fraud fall under MTIC fraud and can be the very harmful as they are often organized so they can be reduplicate to embezzle as much VAT as possible before the... (More)
Summary
The EU and the Member States are concerned about VAT fraud and they consider it necessary to reduce the gap the VAT fraud makes. The purpose of this thesis is to describe three methods that are used in the fight against VAT fraud. Those methods are the reverse charge mechanism, joint and several liability and the knowledge test. Those methods are described, defined how they are used and what are the pros and the cons that follow them.

The VAT fraud can be miscellaneous but it is helpful to categories them in two main categories: Black marked fraud and MTIC fraud. Carousel fraud fall under MTIC fraud and can be the very harmful as they are often organized so they can be reduplicate to embezzle as much VAT as possible before the authorities can stop them.

The revers charge methods works well on MTIC and carousel fraud that are the most serious of the VAT fraud. The problem with the reverse charge is that it is not advisable to use it to general or on to many sectors as it will have negative effective on the VAT system. The best is to use the reverse charge on the sectors that are most sensitive for VAT fraud. However it is only temporary solution. A general reverse charge system is not recommended by the Commission.

Joint and several liability can also work well to fight VAT fraud. Member State must adjust those rules so they comply with general principles of law which form part of the Community legal order, in particular, the principle of legal certainty and proportionality. Case law have had influence on this method and according to it a rule that makes person liable when he is in good faith or no fault or negligence can be imputed to him is in breach with the right interpretation of Article 205 of the RVD. The Commission introduced proposal in December 2008 for EU-wide joint and several liable rules that will held taxable person liable for the payment of the VAT if he don’t fulfill his obligation in reporting his intra-Community supply. It has not been adopted by the Council and it seems unlikely that it will by adopt.

The knowledge test can be useful for tax authorities of the Member State but it put too heavy burden on taxable person while it is not clear how they shall act or how they shall show precaution. The ECJ case 295/09 has added new part to the knowledge test and states that Member State must refuse the application of exemption from VAT on intra-community supply if the action of the taxable person can be assumed by genuine reasons to lead to the VAT in the Member State of destination will go unpaid.

The reverse charge mechanism works well with both joint and several liability and the knowledge test an can even improve them. The other two methods are in many parts similar but while other make person liable for VAT the other refuses deduction of input VAT or zero-rate on intra-Community supply. (Less)
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author
Ludviksson, Ludvik LU
supervisor
organization
course
HARN60 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
VAT, Fraud, Carousel fraud, MTIC, reverse charge, Joint and svereal liability, knowledge test, missing trader
language
English
id
2544656
date added to LUP
2012-06-21 14:27:01
date last changed
2012-06-21 14:27:01
@misc{2544656,
  abstract     = {Summary
The EU and the Member States are concerned about VAT fraud and they consider it necessary to reduce the gap the VAT fraud makes. The purpose of this thesis is to describe three methods that are used in the fight against VAT fraud. Those methods are the reverse charge mechanism, joint and several liability and the knowledge test. Those methods are described, defined how they are used and what are the pros and the cons that follow them. 

The VAT fraud can be miscellaneous but it is helpful to categories them in two main categories: Black marked fraud and MTIC fraud. Carousel fraud fall under MTIC fraud and can be the very harmful as they are often organized so they can be reduplicate to embezzle as much VAT as possible before the authorities can stop them. 

The revers charge methods works well on MTIC and carousel fraud that are the most serious of the VAT fraud. The problem with the reverse charge is that it is not advisable to use it to general or on to many sectors as it will have negative effective on the VAT system. The best is to use the reverse charge on the sectors that are most sensitive for VAT fraud. However it is only temporary solution. A general reverse charge system is not recommended by the Commission. 

Joint and several liability can also work well to fight VAT fraud. Member State must adjust those rules so they comply with general principles of law which form part of the Community legal order, in particular, the principle of legal certainty and proportionality. Case law have had influence on this method and according to it a rule that makes person liable when he is in good faith or no fault or negligence can be imputed to him is in breach with the right interpretation of Article 205 of the RVD. The Commission introduced proposal in December 2008 for EU-wide joint and several liable rules that will held taxable person liable for the payment of the VAT if he don’t fulfill his obligation in reporting his intra-Community supply. It has not been adopted by the Council and it seems unlikely that it will by adopt. 

The knowledge test can be useful for tax authorities of the Member State but it put too heavy burden on taxable person while it is not clear how they shall act or how they shall show precaution. The ECJ case 295/09 has added new part to the knowledge test and states that Member State must refuse the application of exemption from VAT on intra-community supply if the action of the taxable person can be assumed by genuine reasons to lead to the VAT in the Member State of destination will go unpaid.

The reverse charge mechanism works well with both joint and several liability and the knowledge test an can even improve them. The other two methods are in many parts similar but while other make person liable for VAT the other refuses deduction of input VAT or zero-rate on intra-Community supply.},
  author       = {Ludviksson, Ludvik},
  keyword      = {VAT,Fraud,Carousel fraud,MTIC,reverse charge,Joint and svereal liability,knowledge test,missing trader},
  language     = {eng},
  note         = {Student Paper},
  title        = {VAT Frauds in the European Union: The Reverse Charge Mechanism, Joint and Several Liability and the “Knowledge Test”},
  year         = {2012},
}