One of the challenges facing EU Member States is missing trader fraud, which is sometimes referred to in the more colourful language of “carousel” fraud.

This fraud typically involves transactions in goods such as mobile telephones or computer chips, which are bought and sold by various intermediaries before reaching the final consumer. The criminal will insert himself in the supply chain, buying goods from one trader and selling them on to another. The criminal will typically acquire the goods from a person who is not required to charge Value Added Tax (VAT) (for example, from a trader in another member State), but will charge VAT to his customer. The criminal will then make off with the VAT which he has collected from his customer, failing to account to HMRC for either this VAT or the VAT due on his acquisition of the goods. This is not tax avoidance. It is a criminal act, as the “trader” in question never had any intention of complying with his obligation to account for VAT to the tax authority.

The French, Dutch and UK tax authorities have recently reacted to evidence that criminals may be using carbon trading as a vehicle for carousel fraud - this is likely to involve the criminal buying carbon credits VAT-free from suppliers in other EU Member States, and selling it on (plus VAT, which the criminal keeps) to buyers in the criminal’s own EU Member State. The reactions have been different – the French approach is to exempt carbon trading from VAT, whilst the Dutch have extended the reverse charge to domestic carbon trading. The latter requires the customer to self-assess VAT, rather than pay VAT to its supplier, thereby reducing the scope for a criminal supplier to make off with the VAT. The UK have adopted the approach of zero-rating supplies, i.e. making them free of VAT, whilst maintaining the right to recover input VAT. The fact that other jurisdictions in the EU have not acted does not mean that the problem is, or will remain, confined to only these countries.