The European Commission proposes to grant the UK a VAT derogation until 2009, which will allow for an extension to the Reverse Charge rule for certain types of electronic equipment.

Usually the person liable for payment of the value added tax is the taxable person supplying the electronic equipment. In the language of the EC statement, the purpose of the derogation requested by the United Kingdom is to place that liability on the taxable person to whom the supplies are made, but only under certain conditions and exclusively in the case of mobile telephones, computer chips/microprocessors, electronic storage media and handheld electronic devices used for the storage, processing or recording of electronic data – i.e. the reverse charge normally reserved for Fourth Schedule services.

The Commission accepts that within the sector, a significant number of traders engage in tax evasion by not paying VAT after selling the products. Their customers, however, being in receipt of a valid invoice,remain entitled to a tax deduction. In its most aggressive form, the same goods are, via a “carousel” scheme, supplied several times without payment of the VAT. By designating in those cases the person to whom the goods are supplied as the person liable for the VAT, the derogation would remove the opportunity to engage in that form of tax evasion. However, it would not affect the amount of VAT due.