EU questions VAT Split Payment benefit
A European Commission study into the benefits of Split Payments as a VAT collection tool, aimed at combating VAT fraud, has cast doubt on the cost / benefits. The report concludes that the administrative and technology costs of running, tracking and reporting on such a scheme would outweigh any additional VAT recouped.
The study reviewed existing and proposed B2C, B2B and B2G (government) schemes, and regimes paying directly to government or on a withholding basis. The report does leave open the option of better use of technology to overcome the heavy interventions required and resultant costs.
The report also questioned the legal framework for introducing Split Payments in the EU. It is doubtful that the EU VAT Directive alone could be used since it would include a requirement on payment companies and/or banks to process such mechanisms.
Split Payments and VAT fraud
It is estimated that EU member states lose up to €50 billion per annum due to VAT fraud. Split Payments is one mechanism being proposed by the EU to help combat this. The scheme would require B2B customers to pay the VAT element of a sales invoice directly to the government, instead of to their supplier. Thus cutting out the opportunity for misappropriate VAT in the supply chain.
It would be aimed in particular at combatting missing trader fraud, whereby sellers claim to sell cross-border at zero-rated VAT, but actually sell domestically with VAT which is then pocketed. Italy already operates a limited, but successful B2G Split Payment regime.
Poland and Romania are considering a variation whereby the supplier sets-up a controlled VAT Bank Account for receipt of the VAT element. This account is supervised by the tax authorities who can make debits.
The UK is considering such a scheme to combat VAT fraud on B2C e-commerce, which is estimated to cost the country up to £1.5 billion per annum.
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