For those that don’t already know, ‘reverse charging’ is the latest weapon in the fight against carousel fraud, a problem which currently costs the EU somewhere near £35bn per annum.
The term refers to the method by which VAT payments are managed. Normally VAT is charged on goods and then passed back to HMRC at each stage of the supply chain. VAT registered companies are then eligible for refunds from HMRC on goods purchased.
Reverse charging, however, places responsibility for VAT collection solely on the shoulders of those selling to the end user. This is designed to prevent fraudulent companies in the supply chain from charging VAT on goods and then disappearing before they have paid HMRC what is due to them.
As with most things in life however, things are never that straightforward.
The first problem is the administrative burden that this new system places on those operating within the chain. Yes, VAT no longer needs to be charged and forwarded to HMRC: but notational records still need to be kept of goods where the reverse charge has applied – books must balance.
Where they don’t, HMRC can investigate.
The reverse charge rule only applies to shipments over £5,000 in value. For dealers/distributors that work with various order sizes, ‘mixed rules’ are therefore likely to apply which could easily result in administrative errors.
Another problem occurs with credit notes that may be issued for partial amounts. Obviously this presents an issue where orders over £5k in value are then part credited – the paper chain, in terms of reverse charge rules, is complicated in such circumstances and errors are therefore likely.
“Freight crime may actually increase as a result of reverse charging …”
In essence, reverse charging poses a record keeping responsibility that, at least initially, is likely to prove demanding.
Companies therefore need to be insured against errors and omissions of this nature as, should investigation ensue, HMRC’s power to freeze funds still applies.
Taking out insurance in this scenario would guarantee an ‘untouchable’ pot to cover legal fees and similar costs incurred.
But while administrative errors are a concern, another major issue facing the industry is the apathy that reverse charging may generate towards other risk areas.
Carousel fraud has pretty much dominated the news pages for the last two years. During this time, companies have been continuously warned of the risks associated with being caught up in fraudulent supply chains and urged to insure themselves against inspection. For many, this has proved a valuable life line, a fact only too evident when you look at the number of companies that have gone out of business due to sever cash flow restrictions resulting from frozen VAT repayments and un-insured defence costs.
Suddenly, the headlines have changed and reverse charging is offering the security that those operating in the mobile supply chain have been after for so long. The danger now, however, is now that companies have been so focused on VAT fraud and its implications that they fail to take into account other major risk areas in their rush to ‘get back in business’.
Freight theft, for example, has not simply gone away while VAT fraud has been in the spotlight – its prevalence has simply diminished as trading has slowed. Re-awaken the market (as reverse charging promises to) and you re-awaken the potential for loss.
Significant loss at that, given that the average value of mobile phone shipments stolen in freight crime incidents reached over £27,000 at its peak, a period which saw total goods stolen per annum reach almost £60m.
Companies that ignore this danger in their haste to re-enter the market risk a great deal.
Indeed, there are suggestions that freight crime may actually increase as a result of reverse charging, as bogus companies no longer able to profit from VAT scams adapt their plans and take more direct routes to making money from the mobile market, by setting up bogus transportation or security services. There is also a danger that such groups may increasingly try to post bogus staff into legitimate security or freight forwarding operations in order to facilitate ‘insider jobs’.
This is a particular worry as many insurance policies reject claims where a case for insider involvement can be made as technically this is seen as an attempt to defraud. Care should be taken to make sure insurance taken out covers such an eventuality.
So the introduction of reverse charging is a welcome step in the fight against VAT fraud: but it brings its own problems. Those operating within the mobile supply chain need to be aware of these threats and guard against them with adequate insurance. Those that treat the arrival of reverse charging as green light to risk free trading are sorely mistaken and ultimately, without the proper protection, could lose out dramatically.
AUTHOR David Riley is a director at a&b insurance brokers, a leading provider of high risk cargo cover with over sixty years’ industry experience.