Report from the Commission to the Council and the European Parliament - Fifth report under article 12 of Regulation (EEC, Euratom) No 1553/89 on VAT collection and control procedures {SEC(2004)1721}
Date: 2005-01-10
Institutions: European Commission
Subjects: VAT resource, own resources, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.1.2005 
COM(2004) 855 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Fifth report under article 12 of Regulation (EEC, Euratom) No 1553/89 on VAT 
collection and control procedures 

{SEC(2004)1721} 

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TABLE OF CONTENTS 

1. 

Introduction .................................................................................................................. 3 

1.1.  What are Article 12 reports? ........................................................................................ 3 

1.2. 

1.3. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

2.6. 

2.7. 

2.8. 

2.9. 

3. 

The fifth report ............................................................................................................. 3 

Previous recommendations .......................................................................................... 3 

Principal findings of the fifth report............................................................................. 4 

Organisation, structure and VAT policy ...................................................................... 4 

Human resources.......................................................................................................... 4 

Registration .................................................................................................................. 5 

Controls ........................................................................................................................ 5 

Debt recovery and enforcement ................................................................................... 6 

Voluntary compliance 

........................................................................... 7 

Computerisation ........................................................................................................... 7 

Intelligence................................................................................................................... 7 

Evaluation and performance indicators........................................................................ 7 

Conclusions and recommendations.............................................................................. 8 

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1. 

INTRODUCTION 

1.1.  What are Article 12 reports? 

Article 12 of Council Regulation (EEC, EURATOM) N° 1553/891 on the definitive uniform 
arrangements for the collection of own resources accruing from value added tax requires the 
Commission to present a report every three years to the European Parliament and the Council. 
This  report  should  analyse  the  procedures  applied  by  Member  States  for  registering  taxable 
persons and for determining and collecting VAT, as well as the modalities and results of their 
VAT control systems. The report should also contemplate possible improvements.  

resources  and  organisation  and 

To  date,  the  Commission  has  produced  four  reports.  The  first  report’s  recommendations 
focused  on  the  improvement  of  voluntary  and  forced  payment  of  VAT,  emphasising  the 
promotion of voluntary compliance by taxpayers. The first two reports both examined the tax 
in 
administrations’ 
administrative  processes.  The  second  report  also  suggested  continued  improvements  in 
services  provided  for  taxpayers,  the  development  of  preventive  analysis  and  action  plans  to 
minimise taxpayer non-compliance and pursuing, developing or enhancing computerization. It 
also  proposed  better  debt  management.  The  third  report discussed  solutions  to VAT control 
problems and methods of combating fraud. The Commission encouraged common analysis in 
order  to  identify  best  practice  and  enumerated  sectors  with  a  high  risk  of  fraud.  The  fourth 
report looked at the role of administrative cooperation in making common anti-fraud  policy 
more effective. To achieve this purpose, the report also recommended the Member States to 
recognise the challenge of new technology. 

improvements 

recommended 

1.2. 

The fifth report 

The  fifth  report  appears  just  after  the  greatest  enlargement  in  the  history  of  the  European 
Community/Union.  It  is  particularly  important  that  this  report,  which  covers  the  fifteen 
Member States that composed the European Union up to 2003, should not only be studied by 
the  administrations  whose  work  it  analyses.  The  administrations  of  the  ten  new  Member 
States may also derive valuable insights into the organisation and execution of procedures for 
VAT from a study of this report. 

1.3. 

Previous recommendations 

Previous recommendations aimed to optimise respect by taxpayers of their obligations and to 
prevent fraud through an effective control strategy. At the same time, emphasis was given to 
making it easier and more rewarding for taxpayers to comply with the law. The annex to this 
summary  {SEC(2004)1721}  shows  that  Member  States  have  adopted  many  of  these 
recommendations.  However,  there  is  scope  for  further  progress  and  the  main  conclusion  is 
that more remains to be done in areas already identified. 

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OJ L155, 7.6.89 

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2. 

PRINCIPAL FINDINGS OF THE FIFTH REPORT 

2.1. 

Organisation, structure and VAT policy 

if  some  Community  measures  and 

Although VAT has existed in the European Community for some forty years, no attempt has 
been  made  to  harmonise  the  organisation  of  VAT  controls  or  the  structure  of  VAT 
administrations,  even 
limited 
organisational convergence in order to function. Historically, different taxes were managed by 
separate  departments,  even  where  these  fell  theoretically  under  a  single  ministry  or 
directorate-general.  Because  fraud  and  irregularity  do  not  respect  such  boundaries,  previous 
reports argued that all taxes would benefit from closer structural integration or at least greater 
cooperation between services. A by-product of the more effective fight against irregularities 
through  such  integration  would  be  a  simpler  relation  between  taxpayers  and  the  integrated 
fiscal authorities.  

initiatives 

imply 

In several Member States, reorganisation has entailed closer integration of responsibility for 
different  taxes  into  a  single  structure  or  at  least  into  fewer  separate  structures;  no  Member 
State has moved to disaggregate previously integrated tax services. On the other hand, there is 
no  consensus  with  respect  to  the  choice  between  greater  geographical  centralisation  and 
decentralisation, where some movement in both directions has occurred. Some Member States 
are constitutionally committed to decentralisation. The enquiry found that even where there is 
a centralised approach, in practice local offices usually enjoy significant autonomy because it 
is at local level that knowledge and experience are crucial to effective controls. 

Despite the tendency to concentrate fiscal tasks in one or at least fewer departments, the VAT 
administrations still vary in form from an autonomous VAT service to complete submergence 
in  one  fiscal  administration.  All  VAT  administrations  register  taxpayers,  control  their 
activities and recover tax. However, responsibility for fighting fraud is sometimes shared with 
other  services  with  a  purely  repressive  role.  There  seems  to  be  evidence  that  closer 
integration,  or  at  least  better  cooperation,  produces  benefits  for  tax  control.  Organisational 
questions must be seen in the context of overall VAT policy. No fewer than twelve Member 
States have reviewed their tax policies since the fourth report was published. Reorganisation 
has also often led to simplification of structures and procedures to maximise efficiency. 

As  regards  tax  policy,  despite  an  increasing  emphasis  on  civil  and  human  rights  and  also  a 
growing  pressure  to  promote  economic  activity  by  reducing  administrative  burdens  on 
business, some tax administrations have nonetheless acquired new legal weapons with which 
to combat fraud, including the introduction of joint liability, powers to take security for high-
risk tax debts and stricter rules of evidence for the right to deduct input VAT. 

2.2. 

Human resources 

The  data  collected  suggest  that  the  number  of  officials  working  wholly  or  partly  on  VAT 
remained  relatively  stable  between  1999  and  2003,  despite  minor  increases  or  decreases  in 
some  administrations.  All  tax  administrations  are  committed  to  continuous  training  to 
improve  staff  performance.  Nonetheless,  the  number  of  officials  following  courses  and  the 
number of days spent on training fluctuate from year to year in most Member States with no 
clear trends apparent. Although the enquiry generally showed some weaknesses in evaluation 
of  procedures  and  practices,  most  Member  States  evaluate  their  staff  according  to  precise 
rules,  using  both  quantitative  and  qualitative  criteria.  Only  two  Member  States  lack  any 
formal evaluation mechanism. 

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2.3. 

Registration 

Taxable persons must register and obtain a VAT number. National administrations recognise 
that if a person has the intention to trade in goods or services, it is practically impossible to 
refuse  registration.  The  Member  States  and  the  Commission  have  concluded  that  this 
registration procedure can and should be used as a tool to tackle missing trader fraud, as this 
procedure allows to examine the sincerity of the person’s intention. Accordingly, in a majority 
of  Member  States  enquiries  are  made  to  determine  whether  the  individual  or  company 
directors concerned have a record of poor compliance with tax and related laws. Where this is 
so,  registration  may  entail  special  conditions  (e.g.  provision  of  security,  more  frequent  tax 
returns) and will certainly lead to closer examination of the intended activity than is the case 
for known compliant traders. Careful scrutiny of applicants appears to be becoming the norm 
and  in  some  Member  States  this  has  lengthened  the  period  before  traders  considered  risky 
receive their number.  

There is no uniform approach among Member States to the problem of detecting unregistered 
traders.  Earlier  reports  stressed  the  importance  of  encouraging  voluntary  compliance  by 
taxpayers  and  the  enquiry  showed  that  Member  States  generally  accept  the  need  to  invest 
resources  in  this  approach  by  making  it  less  time-consuming  or  costly  for  enterprises  to 
respect  their  obligations,  e.g.  with  respect  to  registration.  At  the  same  time,  more  stringent 
controls,  particularly  targeted  ones,  encourage  compliance  by  increasing  the  chances  of 
discovery  of  non-compliance.  Information  technology  has  played  a  significant  part  in  this 
process, e.g. by registration on-line.  

2.4. 

Controls 

Audit  staff  must  have  unhampered  access  to  traders'  premises,  business  records  and  related 
matters and all tax administrations have conferred similar powers on their controllers to this 
end. These powers are naturally balanced by taxpayers' rights, data protection rules and other 
factors.  

Over  half  of  the  control  is  usually  spent  at  the  taxpayer's  premises.  This  matches  the 
recommendation  in  earlier  reports  to  prefer  on-the-spot  controls  to  "desk  audits"  in  the 
majority of cases, although the latter may sometimes suffice. The enquiry revealed a growing 
tendency  to  establish  a  special  department  to  deal  with  large  firms.  The  Commission 
welcomes  such  flexibility  and  suggests  that  Member  States  should  consider  a  similar 
specialised approach to groups of firms trading as a single entity and to mixed taxable persons 
who  combine  taxed  and  untaxed  activities.  Where  single-tax  controls  remain,  contact  with 
officials  controlling  the  same  taxpayer  for  other  taxes  or  the  appointment  of  an  overall 
coordinator are increasingly seen as essential. 

The  starting  point  for  most  controls  is  a  declaration  (tax  return).  Under  Community 
legislation, Member States must now accept electronic returns and some even demand them. 
Information  technology  enables  electronic  returns  to  be  analysed  quickly  and  thoroughly. 
Administrations often now have a pro-active approach to traders who do not submit returns on 
time. However, few Member States have accurate data concerning the amounts of VAT that 
they have recovered in this way. 

Most administrations have a control programme, usually annual, that aims to target high-risk 
sectors and ensure that all taxpayers are controlled periodically. Large traders are often treated 
separately: they may be monitored continuously or regularly and on average are likely to be 

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visited at least once every three years. On the other hand, small businesses may receive very 
infrequent  visits,  especially  where  control  programmes  or  risk  analysis  do  not  select  them. 
The Commission considers that the VAT groups and mixed taxpayers mentioned above, who 
present  particular  problems,  are  also  suitable  for  frequent  inclusion  in  control  programmes. 
Few  Member  States  could  report  the  relative  percentages  of  controls  carried  out  in  strict 
conformity  with  the  programme and  those chosen for other reasons. While the  Commission 
favours  programming  of  controls,  it  is  important  to  have  the  flexibility  to  deviate  from  the 
programme where circumstances change or new information becomes available. 

The enquiry showed that control activity is normally evaluated, if at all, in quantitative terms 
(i.e.  the  numbers  of  persons/days  involved)  rather  than  qualitatively.  Nonetheless,  the 
introduction by some Member States of feedback mechanisms and "audit insights" that can be 
distributed to all control staff is an interesting way of seeking to diffuse successful practices. 
Control  reports  are  normally  held  at  local  level  and  sometimes  only  in  paper  form.  The 
Commission  commends  the  example  of  Member  States  who  keep  electronic  files  on 
taxpayers. Roughly, half of the Member States keep registers of traders known or suspected to 
have  practised  tax  evasion,  although  national  data  protection  laws  may  restrict  this.  Such 
registers naturally provide important background information when controls are planned and, 
as  noted,  when  new  registration  is  requested.  Administrations  generally  have  a  good  idea, 
even  without  sophisticated  risk  analysis,  of  the  sectors  where  fraud  is  common.  The 
Commission has supported this work by helping Member States to disseminate best practices 
and giving them new legal means to share information on cross border fraud2. 

Whether  or  not  there  is  a  detailed  programme,  controllers  normally  follow  guidelines  and 
checklists  in  order  to  ensure  that  controls  meet  certain  common  requirements.  All  Member 
States  but  two  practise  computerised  audit  and  provide  controllers  with  information 
technology  tools.  Earlier  Article  12  reports  emphasised  the  importance  of  continuing 
computerisation;  progress  in  this  area  has  continued  but  the  Commission  nevertheless 
reiterates that the introduction and constant enhancement of computerisation benefit both the 
administration  and  compliant  traders.  The  enquiry  showed  that  most  Member  States  collect 
few  data  about  controls  and  their  results,  with  some  failing  even  to  record  the  number  of 
controls  or  the  amounts  of  unpaid  tax  identified  and  recovered.  Available  data  indicate  that 
control coverage fluctuates over time and in one Member State, there appeared to be a current 
decline  in  control  activity.  The  Commission  encourages  Member  States  to  keep  better 
statistics and records describing the outcome of their control efforts. 

2.5. 

Debt recovery and enforcement 

Encouragement  of  voluntary  compliance  helps  to  ensure  that  debts  are  recovered  in  time 
without  additional  enforcement  measures.  Nevertheless,  earlier  reports  also  urged  Member 
States  to  manage  debt  in  ways  that  maximise  payment.  Better  information  about  taxpayers 
and  their  financial  situation,  identification  of  taxpayers  who  may  become  insolvent  or 
untraceable, rapid reaction in case of default and closer relations between services managing 
different taxes have all contributed to improvements. Debt-management involving deferment 
or payment by instalments may be more likely to produce revenue than pushing taxpayers into 
insolvency.  Tax  departments  often  hold  banking  and  other  financial  information  about 

2 

Report from the Commission to the Council and the European Parliament on the use of administrative 
cooperation  arrangements  in  the  fight  against  VAT  fraud,  COM  (2004)  260  and  Council  Regulation 
(EC) n°1798/2003 of 7 October 2003 on Administrative Co-operation. 

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taxpayers, as well as data from other sources. Where rules on privacy do not restrict access to 
such information, it may be used both to prevent potential default and to show how to pursue 
enforcement. 

The range of instruments used for recovery is very wide, but there is a growing emphasis on 
pre-emptive intervention to avoid the need for such measures. When it comes to writing off 
seemingly unrecoverable debts, the enquiry revealed wide variations in practice. At least three 
Member  States  mentioned  the  possibility  of  waiving  debts  whose  recovery  would  incur 
disproportionate costs. There was a noticeable tendency to abolish the precedence given to tax 
debts  in  case  of  bankruptcy.  Currently,  seven  Member  States  are  re-examining  recovery 
procedures with a view to reform. This process would be greatly aided by closer monitoring 
of debt and better evaluation of recovery mechanisms than the enquiry revealed. 

2.6. 

Voluntary compliance 

Encouragement  of  voluntary  compliance  underlies  many  of  the  recommendations  of  earlier 
reports. Registration, self-assessment, submission of VAT returns and timely payment without 
any  prompting  from  the  administration  all  reduce  administrative  costs  and  voluntary 
compliance  is  therefore  worth  some  investment  of  resources.  For  it  to  work,  however, 
taxpayers  must  be  convinced  of  the  benefits  for  them,  must  consider  the  tax  system 
sufficiently equitable and must be convinced of the efficiency and enforcement capacities of 
the administration. 

2.7. 

Computerisation 

All Member States’ tax administrations have computerised some, if not all, of their activities. 
This has two facets: the administration benefits from computerization of its own activities and 
the services provided to taxpayers. Such developments fit well with the pursuit of voluntary 
compliance.  The  growing  use  of  information  technology  is  a  universal  phenomenon  at  all 
levels  of  business  and  administration.  The  information  collected  in  this  report  about  the 
benefits of a judicious use of computerisation may help to diffuse best practice. The Member 
States that do not yet use computerised audit may find advice in this report.  

2.8. 

Intelligence 

Earlier  reports  saw  advantages  in  the  establishment  of  a  specialised  department  to  collect, 
analyse  and  disseminate  intelligence.  While  five  Member  States  have  created  a  central 
intelligence  department  to  gather  and  issue  information  about  individual  taxpayers,  sectoral 
trends  and  types  of  fraud,  the  others  work  with  decentralised  structures.  The  Commission 
concludes that decentralised arrangements can work effectively, thanks to the development of 
modern computer networks. However, at least five Member States do not appear to transfer 
control  results  to  the  intelligence  system  and  only  a  minority  have  a  fully  functioning 
intelligence  system  with  structured  data  collection,  feedback  and  follow-up.  There  is  still 
scope for improvement. 

2.9. 

Evaluation and performance indicators 

In  order  to  measure  efficiency,  effectiveness  and  the  implementation  of  plans  and 
programmes,  tax  administrations  have  increasingly  identified  performance  indicators,  as 
recommended in earlier reports. So far, however, most indicators are quantitative rather than 

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qualitative  and  rarely  take  account  of  costs  to  taxpayers.  The  Commission  favours  greater 
attentiveness to the quality of service provided both to the fiscal authorities and to taxpayers.  

3. 

CONCLUSIONS AND RECOMMENDATIONS 

Full  account  of  the  conclusions  and  recommendations  is  given  in  the  Commission  staff 
working paper (SEC(2004)1721). 

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