Changes in tax legislation usually take time. Calls for evidence, consultations, budget preludes and light-touch periods are commonly used to ensure that taxpayers have time to adapt and prepare for changes. Therefore, the announcement last Thursday that VAT law applying to renewable energy certificates (or Guarantees of Origin) was changing overnight was somewhat unusual. This announcement represents HMRC’s most recent (and quickest) adaption to missing trader VAT fraud.
As we eagerly await the latest figures on the tax gap – the difference between the tax that should be paid and the tax that has been paid - we should reflect on some of the successes reported last year.
Over the course of the last 15 years, HMRC has proved increasingly effective at tackling missing trader VAT fraud. In 2005-06, HM Treasury estimated that between £2.5bn and £3.5bn of VAT was lost to this criminal activity compared to less that £0.5bn in 2016-17. There’s every chance it’s regarded as such a small crime in 2017-18 that it’s no longer reported.
Missing trader fraud involves criminals selling products that are subject to UK VAT but not paying the VAT that they’ve collected from innocent customers to HMRC. This means that criminal gangs tend to pick products that don’t bear VAT on their purchase (originally buying goods from EU suppliers) and that are high value but relatively easy to dispose of. It began with mobile phones and computer chips, but has since moved to wholesale telecommunications services, emissions allowances and most recently to construction services where important and highly disruptive changes are being introduced in October this year.
Legislative changes which alter market participants' VAT accounting requirements have enhanced HMRC’s efforts to detect fraudsters. In particular, instead of taxpayers charging VAT, VAT-registered customers receive products from UK suppliers VAT-free and account for VAT on the purchases they’ve received on their own VAT return.
While this system reduces fraud, it’s far from perfect. Those legitimate businesses trading in affected industries bear the brunt of the problems.
First and foremost, if you buy affected products and inadvertently pay VAT to a fraudulent supplier incorrectly (because it should have been subject to the reverse charge) HMRC has the power to refuse your right to recover this VAT. As a supplier of affected products, you are obliged to verify that your customers are VAT registered. However, this may be difficult in practice.
Even if you account for VAT perfectly (and exclusively with legitimate businesses), many businesses will be negatively affected by the changes to their working capital. At present, you may be paid VAT on your sales several months before it is due to be paid to HMRC. The transition to a reverse charge mechanism (where you may have to wait several months before recovering VAT on your costs) may be painful.
So if you generate renewable energy, or trade in renewable energy certificates (which may be referred to as Guarantees of Origin, Renewable Obligation Certificates, Renewable Energy Guarantee of Origin and International Renewable Energy Certificates) you should take immediate action to ensure that you have adapted your systems to reflect this change.