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.
