EU may refuse UK VAT derogation on fraud problem
The European Commission has indicated that it may be unwilling to extend the UK VAT exemption / reverse charge on the sale of mobile phones and other high-value electronics within the EU.
The derogation from the EU VAT Directive was permitted to help combat the problem of VAT fraud. Many criminal gangs had been registering for UK VAT, and then reclaiming the input VAT on the local purchases of phones etc. However, they then claimed that the phones were sold outside of the UK, and therefore exempt from UK VAT. The gangs would in fact sell them locally and then vanish.
To help combat this problem, the EC granted the UK an temporary VAT exemption on these types of transactions, taking the VAT out of the equation. Since then, a number of other states have followed suit. The EC has extended the UK exemption a number of times.
However, the EC has warned the UK that it may now not be prepared to continue the VAT exemption beyond the latest deadline of 31 December 2013. It has reminded the UK that such exemptions were only meant as a temporary last resort, and that other measures should be introduced to combat the problem.
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