The European Council recently reached political agreement on a package of measures aimed at enabling member states to better combat VAT fraud. The measures will be based on two directives - one aimed at enabling immediate measures to be taken in cases of sudden and massive VAT fraud (“quick reaction mechanism”) and the other allowing member states to implement a reversal of liability for the payment of VAT on the supply of certain goods and services (“reverse charge mechanism”).

According to published documents, fraud schemes evolve rapidly, giving rise to situations that require a swift response. A common example is “carousel” fraud, where supplies are rapidly traded several times without payment of VAT. Until now, such situations have been tackled either by amendments to the VAT directive or through individual derogations granted to member states under that directive. Both require a proposal from the Commission and a unanimous decision by the Council, a process that can take several months.

The proposed “quick reaction mechanism” would involve an accelerated procedure for allowing member states to apply a “reverse charge” (see below) to specific supplies of goods and services for a short period of time, by derogation from the provisions of the VAT directive. The proposed “reverse charge mechanism” is aimed, at closing off certain types of known VAT fraud, in particular carousel schemes, by allowing liability for the payment of VAT to be shifted from the supplier (as normally required by EU rules) to the customer. Member states would have the option of applying it within a pre-determined list of sectors.

The two mechanisms will be temporary and exceptional, and their timeframe will be aligned until the end of 2018.