What is VAT?

Pages255-259
DOIhttps://doi.org/10.1108/eb025716
Published date01 January 1996
Date01 January 1996
AuthorSimone White
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 3 No. 3 EC Fraud
EC FRAUD
What is VAT?
Simone White
INTRODUCTION
Over 50 per cent of the EC budget comes from a
proportion of the Member States' VAT. Each
Member State has a unique constellation of VAT
rate,
collection and remission procedures and pros-
ecution policies. Some of these constellations
create potential 'internal tax havens' within the
Single Market. The author argues that an effective
strategy to protect the finances of the Community
after the transition period would require (i) the
harmonisation of some of the collection pro-
cedures, (ii) improved mutual assistance and (iii)
the setting of some minimum standards of prose-
cution throughout the Community.
According to UCLAF (the Commission's coor-
dination unit in the fight against fraud), in 1994
reported cases of fraud and irregularities affecting
the EC budget overall amounted to 1.2 per cent of
the total budget of approximately ECUs 70bn.
There is, as far as the irregularities affecting the
EC budget are concerned, a myth that they occur
mostly on the expenditure side, ie with regards to
subsidies to farmers and exporters. Missing olive
oil,
marauding cows, butter sold as margarine:
export and farm frauds, let us be frank, make good
headlines. But the reality is that irregularities
involving larger amounts exist on the 'income' side
of the budget. In fact in 1994 they amounted to 3.4
per cent of EC budget revenue.1 This paper
focuses on VAT, the greatest source of EC
revenue, which is collected and controlled by the
Member States themselves.
THE ABOLITION OF FISCAL FRONTIERS
When VAT was first introduced in 1967 as a sales
tax on goods and services to be used across the
whole of the community (of the original six
founding Member States), the intention was to
work towards uniform indirect taxation.2 There is,
as yet, no uniform rate of VAT in the European
Union, nor for that matter of excise duties.
Standard VAT rates vary between 15 per cent in
Luxembourg to 25 per cent in Sweden (see Table
1).
In addition, the Member States apply increased,
reduced, super-reduced rates (less than 5 per cent)
and exemptions according to national policies. To
quote but one example, although books attract 25
per cent VAT in Denmark and Sweden, they are
zero rated in the United Kingdom and Ireland.
Since 1st January, 1993 fiscal frontiers have been
abolished.3 As a result the concept of import and
export within the Community has been replaced
by the concept of intra-community acquisition and
supply of
goods.
As far as intra-Community acqui-
sitions are concerned, the transitional mechanism
for the collection of VAT works as follows. The
vendor invoices the purchaser for the goods at a
zero rate of VAT. It is then the purchaser's respon-
sibility to declare the purchases for VAT purposes,
and to pay VAT at the going rate. Obviously this
system is open to abuse. This arrangement is to
give way to a system where VAT will be paid at
source in 1997.
EC BUDGET: INCOME
In 1993 the Member States' contributions to the
EC budget amounted to approximately ECUs
67bn. The same contributions fall into three main
categories. First, each Member State pays a weigh-
ted 1.4 per cent of their VAT revenues into the EC
budget (approximately ECUs 38bn). At present
this is the main source of finance for the EC
budget. Since 1988 the Member States have also
made a contribution based on their GNP,4 which
constitutes the second largest contribution from
the Member States. Lastly 'traditional own
resources' are made up of customs levies (import
duties for certain goods coming from outside the
Page 255

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