Communication from the Commission to the Council and the European Parliament on measures to change the VAT system to fight fraud {SEC(2008) 249}
Date: 2008-02-22
Institutions: European Commission
Subjects: VAT, delivery, intra-EU trade, tax evasion, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 22.2.2008 
COM(2008) 109 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

on measures to change the VAT system to fight fraud 

{SEC(2008) 249} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

Background .................................................................................................................. 3 

The aim of this Communication................................................................................... 4 

Taxation of intra-Community supplies in the Member State of departure .................. 4 

Results of Commission analysis .................................................................................. 5 

Conclusion on taxation of intra-Community supplies ................................................. 7 

Reverse charge ............................................................................................................. 7 

Results of Commission analysis .................................................................................. 7 

Coherence with current VAT system........................................................................... 9 

Conclusion on reverse charge ...................................................................................... 9 

The possibility of running a pilot project for a limited period in an interested Member 
State............................................................................................................................ 10 

Results of Commission analysis ................................................................................ 10 

Conclusion on pilot project ........................................................................................ 11 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

on measures to change the VAT system to fight fraud 

1. 

BACKGROUND 

The  ECOFIN  Council  of  5  June  2007  requested  the  Commission  to  examine  two 
more “far-reaching” measures to tackle VAT fraud: 

•  the taxation of intra-Community transactions, and 

•  the  introduction  of  the  option  of  applying  a  blanket  reversal  of  tax  liability  (a 

general reverse-charge system). 

In addition, the Council specifically asked the Commission to analyse the possibility 
of running a generalised reverse-charge pilot project for a limited period of time in 
an interested Member State. 

At its meeting of 4 December 2007, the Council urged the Commission to present its 
findings  on  the  work  on  such  more  far-reaching  measures  so  that  these  could  be 
debated  during  the  first  quarter  of  2008.  This  Communication  is  presented  by  the 
Commission in reply to that request from the Council. 

As regards the taxation of intra-Community transactions, the Council asked that the 
Commission first explore the possibility of taxing these transactions in the Member 
State of departure, and that it focus on the following aspects: 

•  the general effects of a clearing procedure on the budgets of Member States and 
specifically  on  principally  “importing”  Member  States  and  on  principally 
“exporting” Member States; 

•  a  rough  estimate  of  the  additional  costs  for  taxpayers  and  tax  administrations 

caused by introducing the taxation of intra-Community supplies; 

•  the  risk  of  new  forms  of  fraud  and  efficiency  in  eliminating  existing  fraudulent 

activities; 

•  the allocation of responsibilities and risks between the Member State of departure, 

where tax is paid, and the Member State of arrival, where tax is deducted; 

•  competitive  aspects  of  taxing  intra-Community  supplies  in  relation  to  domestic 

tax rules and in comparison with the current scheme. 

As far as the concept of a generalised reverse charge is concerned, the Council asked 
the Commission to address the following aspects: 

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•  the  effects  on  Member  States  that  do  not  apply  the  reverse-charge  system, 
the 
their  budgets, 

including  with  regard 

to 

especially 
competitiveness of their companies; 

the  effects  on 

•  the coherence and harmonisation of VAT law in the EU; 

•  the costs for taxpayers and administrative authorities of implementing a reverse-

charge system; 

•  the migration of fraud cases to those Member States that do not apply a reverse-

charge system; 

•  the risk of new forms of fraud; 

•  the  possibility  of  running  a  pilot  project  for  a  limited  period  of  time  in  an 

interested Member State. 

2. 

THE AIM OF THIS COMMUNICATION 

In  view  of  the  relatively  short  time  available  to  the  Commission,  the  results  of  the 
analysis  are  mainly  based  on  some  specific  studies  by  a  consultant,  the  value  of 
which  remains  limited;  the  replies  received  to  questionnaires  sent  out  to  tax 
administrations; feedback from businesses, and analysis by Commission staff. There 
are a number of issues that might require further and more in-depth analysis, but the 
initial results obtained already permit the formulation of a number of basic questions 
to  the  Council  of  Ministers  which  are  necessary  in  order  for  the  Commission  to 
orientate any further work. 

The more-detailed analysis is contained in the attached staff working paper. On the 
basis of that analysis, this Communication explains the state of play relating to the 
different options for changing the current VAT system, thereby taking up the points 
referred to the Commission by the Council, and raises the political questions which 
the Commission expects the Council to answer. Further work on measures to change 
the  VAT  system  to  fight  tax  fraud  could  only  be  usefully  undertaken  if  clear  and 
concise guidance on these questions is given and further appropriate input is received 
from tax administrations. 

3. 

TAXATION  OF  INTRA-COMMUNITY  SUPPLIES 
DEPARTURE 

IN  THE  MEMBER  STATE  OF 

Since 1987, the Commission has advocated the origin principle of VAT as being the 
only way to ensure the creation of a real internal market. The 1987 proposal and that 
made  in  1995  had  as  a  starting  point  the  harmonisation  of  VAT  rates,  or  at  least  a 
very  close  approximation  of  those  rates,  so  as  to  ensure  that  there  would  be  no 
distortion in competition. However, Member States were not at that time, and are still 
not  willing  to  cede  their  sovereignty  as  regards  setting  the  level  of  VAT  rates. 
Therefore,  in  designing  a  system  of  taxation  of  intra-Community  supplies,  the 
Commission  has  set  out  a  system  that  does  not  require  such  far-reaching 
harmonisation. Accordingly, the concept of taxation of intra-Community supplies is 

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based  on  the  principle  that  domestic  VAT  rates  will  continue  to  apply  exactly  as 
hitherto,  and  the  only  change  would  be  to  replace  the  exemption  for  intra-
Community  supplies  by  taxation  at  the  rate  of  15%.  Where  the  Member  State  of 
arrival of the goods applies a rate of more than 15%, that additional VAT will accrue 
to that Member State; where the Member State of arrival of the goods applies a rate 
lower than 15% because of the application of one or more reduced VAT rates or the 
zero rate in certain Member States, the Member State of the purchaser will allow a 
credit  to  the  taxable  person  making  the  intra-Community  acquisition.  In  the  same 
vein, the Member State of arrival will be able to collect VAT that results from any 
limitation  applicable  to  the  acquirer’s  right  to  deduct  input  VAT.  In  this  way, 
distortions of competition which might otherwise arise from different national levels 
of VAT rates are avoided. 

3.1. 

Results of Commission analysis 

Taxation of intra-Community supplies appears to provide an adequate solution to the 
problems  caused  by  Missing  Trader  Intra-Community  (MTIC)  fraud.  It  would 
however by no means solve other types of fraud. In fact, bringing intra-Community 
supplies within the scope of taxation could add opportunities for other existing fraud 
patterns to be used in respect of such transactions. It is, however, impossible at this 
stage  to  measure  the  overall  expected  result  of  a  change  to  taxation  of  intra-
Community  supplies  in  the  Member  State  of  departure.  Furthermore,  competitive 
aspects have to be taken fully into account. While there is little reason to believe that 
tax differentials between a common rate of 15% and the rates currently operated by 
Member States would have any major impact, the potential cash-flow impacts raise 
some  concerns.  In  fact,  given  that  intra-Community  supplies  currently  amount  to 
€2 400 billion per annum, the amount of VAT which would have to be financed by 
businesses would be in the order of €360 billion, which could have various cash-flow 
effects  that  are  extremely  difficult  to  evaluate  as  they  depend  on  factual 
circumstances, such as the relationship between supplying and acquiring businesses 
and  the  relationship  between  taxable  persons  and  their  tax  administrations.  It  is 
impossible  to  generalise  such  individual  circumstances,  and  they  would  require 
detailed modelling to arrive at a reliable conclusion. What is clear, however, is that 
taxation of intra-Community supplies would be likely to further disadvantage SMEs. 
This  is  because  SMEs  are  already  in  a  disadvantageous  position  on  the  domestic 
market when it comes to matters of pre-financing. 

Other costs for taxpayers are dependent largely on the reporting obligations that are 
considered to be necessary both for the taxation of intra-Community supplies and for 
the essential clearing system. The Commission considers that monthly recapitulative 
statements  both  from  the  supplier  and  the  acquirer  should  be  sufficient  in  that 
respect. In this regard, the costs involved are basically that of the typical one-off cost 
of the change and are minor in the longer term. The change regarding the shortening 
of  the  time  period  covered  by  recapitulative  statements  is  anyway  envisaged  under 
the  current  system  —  the  Commission  is  in  the  course  of  presenting  the  relevant 
proposals in response to the invitation formulated by ECOFIN in June 2007 — and 
the extension of the reporting obligations to taxable persons acquiring goods is likely 
to result only in limited costs. 

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Costs  for  tax  administrations  appear  to  be  quite  difficult  to  estimate  with  any 
accuracy.  The  replies  from  Member  States  to  the  questionnaire  did  not  offer  much 
guidance in this respect. 

For Member States, the most important issue to be considered would be likely to be 
the way in which the clearing system would function. Contrary to the position taken 
in  1996,  the  Commission  would  prefer  microeconomic  bilateral  clearing  based  on 
recapitulative  statements.  This  would  give  Member  States  room  for  manoeuvre  to 
define, within common guidelines still to be drawn up, the precise way they want it 
to operate. The information on the recapitulative statements, which would also serve 
the purpose of clearing, would have to be based on invoices issued and received as 
the  current  rules  regarding  the  taxable  events  associated  with  intra-Community 
transactions would not be sufficient to ensure that the declaration by the supplier, the 
payment  of  the  tax,  the  supplier’s  recapitulative  statement,  the  purchaser’s 
recapitulative  statement  and  the  deduction  by  the  purchaser  occurred  in  the  same 
time  period.  For  consistency,  the  same  rules  would  have  to  be  applied  to  domestic 
transactions. 

All Member States would be concerned by the clearing system — they would either 
have to pay to other Member States or receive from other Member States depending 
on  their  relative  trade  balance.  In  principle,  all  Member  States  would  have  to  both 
pay  and  receive.  According  to  the  overall  balance  of  trade  statistics,  16  Member 
States would be overall “net receivers’ whereas the other 11 Member States would be 
“net  payers”.  For  the  16  Member  States, the  total  amount  of  excess  of  acquisitions 
over supplies in 2006 was of the order of €200 billion. Applying a VAT rate of 15% 
would mean that these Member States would be expecting to receive tax revenues of 
€30  billion  from  the  other  Member  States.  This  should  be  seen  in  the  perspective 
that, for the majority of Member States the value of intra-Community supplies is 
between  10%  and  20%  of  total  supplies,  so  Member  States  would,  in  any  event, 
still  have  the  guarantee  that  they  could  depend  on  80%  to  90%  of  their  total  VAT 
which would be due from their own taxable persons. 

In accordance with the wishes of the Council, the Commission has not at this stage 
gone into intricate details of the workings of the clearing system. Nevertheless, it is 
clear  that  in  order  to  avoid  budgetary  deficits,  the  first  payment  would  need  to  be 
made  between  Member  States  very  soon  after  the  reference  month  and  a  “final” 
settlement of the balance would need to be established at other appropriate intervals 
of  six  and  12  months.  What  is  more  important at this stage is the understanding of 
responsibilities between Member States. A Member State would always be liable to 
pay  the  VAT  shown  on  the  recapitulative  statement  of  the  supplier  to  the  Member 
State of the purchaser even if the taxable person making the supply did not pay over 
the tax to his Treasury. The Member State of the customer would control its taxable 
persons  in  the  normal  way  to  ensure  that  they  had  not  over-deducted  VAT  on  the 
intra-Community  acquisitions.  Applying  these  principles  would  ensure  that  each 
Member  State  has  the  incentive  to  correctly  collect  and  control  the  VAT. 
Nevertheless,  were  there  to  remain  differences  that  could  not  be  clarified  it  is 
suggested  that  both  Member  States  equally  bear  any  shortfall  so  as  to  ensure  that 
both have the incentive to exercise a proper control function. 

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3.2. 

Conclusion on taxation of intra-Community supplies 

The  analysis  which  the  Commission  was  in  a  position  to  carry  out  within  the 
timeframe  fixed  by  the  Council  revealed  that  a  system  of  taxation  of  intra-
Community  supplies  has  a  number  of  positive  elements.  It  also  identified  certain 
concerns, but none of them are of such a nature that the system should be discarded. 

However, there is one major issue which in the Commission’s view would need to be 
clarified  before  investing  in  further  analysis  of  the  system.  Politically,  the  most 
difficult issue involved would be that of making individual Member States’ tax 
receipts  dependent  on  transfers  made  by  other  Member  States.  As  its  impact 
may  amount  to  some  10%  of  the  overall  VAT  receipts,  and  the  overall  volume 
represents  some  €30  billion  at  EU  level,  the  question  which  logically  arises  is 
whether Member States are prepared to enter into such a dependency. 

If  the  answer  were  yes,  the  Commission  would  be  prepared  to  come  forward  with 
more  detailed  information  as  to  the  concrete  working  of  the  clearing  system,  and 
would  also  finalise  the  analyses  needed  concerning  the  particular  set-up  of  the 
taxation  scheme.  Clearly  such  work  would  require  further  input  from  tax 
administrations. 

Were  the  answer  to  be  no,  any  system  involving  a  clearing  mechanism  would  be 
ruled  out.  In  that  case only  taxation  of  intra-Community  supplies  at  destination 
would  be  an  alternative  and  the  Commission  would  expect  guidance  from  the 
Council  on  whether  that  alternative  should  be  analysed  further  or  not.  The 
Commission would, however, want to indicate clearly that such an alternative would 
require  the  setting-up  of  a  real  One-Stop  Scheme  —  which  the  Council  and  the 
European Parliament in any event support — and it would allow for taxation at the 
appropriate  rate  in  the  Member  State  of  acquisition  —  a  common  rate  of  15%  for 
intra-Community supplies would not be necessary. In addition, there would be lower 
costs both for taxable persons and for tax administrations. 

These  are,  in  the  Commission’s  view,  the  elements  for  which  further  guidance 
from  the  Council  is  necessary  to  determine  whether  the  taxation  of  intra-
Community supplies remains an option to be considered. 

4. 

REVERSE CHARGE 

4.1. 

Results of Commission analysis 

The Commission believes that the introduction of a generalised reverse charge would 
substantially reduce MTIC fraud as well as other types of deduction fraud. However, 
it is concerned that reverse charge may end up negatively affecting Member States’ 
revenues due to other new types of fraud. 

To  combat  such  new  types  of  fraud,  principally  untaxed  consumption  and  the 
misuse of VAT identification numbers, the system would need to be accompanied by 
a number of measures that would complicate the system and create new burdens for 
businesses and tax administrations. 

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Firstly, it would appear necessary to apply a threshold in order to limit the risk of 
untaxed  final  consumption.  Such  a  threshold  would  appear  to  be  a  major 
complication as it would require distinctions that are not currently operated and that 
do  not  correspond  to  any  commercial  reality.  It  also  requires  a  series  of  new 
definitions  to  make  it  applicable  in  practice  and  to  cover  all  various  possible 
situations. 

Secondly, since the system would be based on making a distinction between taxable 
persons  qualifying  for  making  purchases  under  the  reverse-charge  system  and  all 
other  persons,  new  responsibilities  are  imposed  on  the  taxable  persons  having  to 
operate such identification. Tax administrations would need to develop and offer the 
necessary tools for businesses to cope with such challenges and to provide them with 
the  legal  certainty  they  need  when  deciding  on  application  of  the  normal  VAT 
system  or  reverse  charge.  It  should  not  be  overlooked  that  basically  all  taxable 
persons are likely to have to apply both systems in parallel, thus provoking a great 
deal of complication. Moreover, the system would result in an increase in the number 
of  refund  claims  made  by  taxable  persons  who  would  no  longer  be  able  to  offset 
input tax on smaller acquisitions as their output would remain untaxed under reverse 
charge.  As  Member  States  already  dedicate  a  disproportionate  amount  of  their 
resources  to  checking  repayment  claims,  it  would  appear  that  they  would  have  to 
increase  their  human  resources  to  ensure  that  the  current  level  of  control  was 
maintained on taxable persons whose declarations show a liability. This may directly 
affect the efficiency of VAT as a revenue source for Member States. 

Thirdly,  to  overcome  the  disappearance  of  the  fractioned  payments,  compensatory 
reporting  obligations  would  need  to  be  introduced  that  allowed  for  basic  cross-
checking of the information stemming from suppliers and acquirers. Such obligations 
would  need  further  refining  in  order  to  guarantee  consistency  in  reporting  with  the 
objective of avoiding mismatches of data. 

While  the  additional  costs  such  a  system  would  create  for  businesses  are  not  fully 
known,  the  reporting  obligations  alone  would  represent  some  significant  one-off 
costs for introduction as well as recurrent costs. It appears that the correct operation 
of  a  threshold  is  by  far  and  away  the  most  costly  element  of  reverse  charge  for 
businesses.  A  recent  study  for  the  Vienna  Chamber  of  Commerce  by  the  Austrian 
Institute  for  SME  Research  indicates  that  the  one-off  costs  for  SMEs  would  vary 
between  €12 750  and  €20 000,  while  the  on-going  annual  costs  would  amount  to 
between €6 000 and €9 300. An earlier German study estimated the overall costs for 
German  taxable  persons  at  between  €1.6  billion  and  €2  billion  in  the  year  of 
introduction  of  reverse  charge  and  between  €100  million  and  €200  million  in  on-
going annual costs. 

The  cost  for  tax  administrations  would  depend  very  much  on  the  control  measures 
they would implement.  Whereas there would be gains on the one hand — as  fraud 
related  to  VAT  deductions  would  be  largely  reduced  —  there  are  new  areas  for 
which specific control would appear to be unavoidable. In fact under reverse charge, 
the bulk of the VAT would be payable by the final suppliers in the production chain 
who in many countries may be smaller and less trustworthy than the small number of 
large  businesses  that  currently  pay  a  large  proportion  of  the  VAT  in  most  Member 
States.  Clearly,  the  nature  of  the  retail  sector  makes  it  more  resource-intensive  to 
control, especially with the prospect of all retailers receiving tax-free supplies. New 

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detailed  reporting  obligations  on  all  businesses  within  the  economy  would  equally 
require  new  forms  of  risk  management  in  order  to  manage  the  new  huge  flow  of 
information. The identification of taxable persons would be even more crucial than 
under the current system and would require additional efforts and resources. Finally, 
general  control  of  all  businesses  needs  to  be  maintained  —  not  only  those  paying 
VAT — in order to avoid diversion of goods and services to the black economy. In 
their  replies  to  the  questionnaire,  Member  States  were  largely  unable  to  give 
indications as to the extent of costs administrations would be likely to incur. 

In  the  replies  from  Member  States  there  was  little  concrete  hint  as  to  the  potential 
effects  of  applying  a  reverse-charge  system  on  other  Member  States.  Responses 
indicate, nevertheless, that it was deemed necessary to operate a very tough control 
system in order to protect other Member States from adverse effects that the reverse 
charge  could  potentially  create.  Administrative  cooperation  is  judged  to  need 
improvement in order to cope with such a new situation. 

There  is  little  evidence  of  fraud  migrating  to  other  Member  States  because  of  the 
introduction  of  specific  anti-fraud  measures.  As  such  measures  were  traditionally 
sector-specific in the past there are, however, concerns that a more general measure 
such as the reverse charge may have different consequences. 

4.2. 

Coherence with current VAT system 

The Commission takes the view that such a fundamental change to the VAT system 
as  a  result  of  introducing  a  generalised  reverse  charge  on  an  optional  basis  would 
significantly affect the coherence and harmonisation of the EU VAT system and the 
scope for its future development. 

EU  legislation  is  currently  drafted  and  developed  with  a  common  framework  in 
mind.  A  European  Community  with  two  fundamentally  different  VAT  systems 
would  necessitate  consideration  of  both  systems  when  drafting  and  discussing 
legislation. It would be extremely difficult to add further developments to such a dual 
system in order to match the evolving internal market. This is particularly important 
when it comes to two completely different sets of obligations. Such a biased system 
would put future harmonisation of VAT at major risk as Member States’ interests in 
making improvements would differ depending on the system they apply. 

It  is  thus  important  to  realise  that  having  the  reverse  charge  on  an  optional  basis 
would represent a step away from the current level of harmonisation which benefits 
businesses  operating  on  the  single  market.  The  additional  complications  for 
businesses engendered by an optional reverse charge would appear to fly in the face 
of  Community  growth  and  jobs  objectives  which  depend  upon  reducing  the 
obligations  on  businesses.  In  particular,  it  would  be  contrary  to  the  VAT  strategy 
pursued  so  far,  which  aims  to  further  simplify  the  operation  of  VAT  in  the  single 
market by reducing burdens and obligations on businesses and providing them with 
legal certainty. 

4.3. 

Conclusion on reverse charge 

A  generalised  reverse-charge  system  would  clearly  be  a  new  concept  that  could 
generate  both  positive  and  negative  consequences.  Independent  of  any  final 

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judgement on the system, there is, however, a major problem with the concept of an 
optional  reverse-charge  system.  This  is  because  the  reverse  charge  would  be  a 
fundamentally different system to the one currently applied. It would necessitate the 
definition  of  a  second  system  at  EU  level  and  thus  have  negative  consequences  on 
operation  of  the  internal  market;  it  also  would  undermine  harmonisation  and 
possibilities for future improvement of the VAT system. 

In  addition,  the  optional  character  of  a  generalised  reverse-charge  system  has  been 
identified as a cost factor for businesses and as one of the main factors creating risks 
of new types of fraud within the EU. 

The Commission therefore believes that a general reverse-charge system should 
either be introduced on a mandatory basis throughout the EU or be disregarded 
as a concept. 

5. 

THE  POSSIBILITY  OF  RUNNING  A  PILOT  PROJECT  FOR  A  LIMITED  PERIOD  IN  AN 
INTERESTED MEMBER STATE 

5.1. 

Results of Commission analysis 

In  the  light  of  the  above  analysis,  the  Commission  is  still  not  convinced  about  the 
suitability  of  the  general  reverse-charge  model  as  a  means  of  making  the  VAT 
system more fraud-proof. It accepts the obvious deterrent effects on MTIC fraud but 
is concerned about the other effects of such a change. However, it has to stress that 
the analysis carried out of the reverse charge is mostly a hypothetical exercise since 
there is no real experience available from which to draw any lessons. The analyses 
carried out so far would not allow a final decision to be taken, especially because of a 
lack  of  empirical  evidence  —  no  country  in  the  world  currently  operates  such  a 
system. Since any further analysis would in any event face the same problem because 
of its hypothetical character, the Commission believes that only a pilot project in a 
Member State could provide a more substantive reply to the questions raised by the 
Council. 

Nevertheless, it must be underlined that the purpose of the pilot project would be to 
test  the  introduction  of  an  obligatory  general  reverse  charge,  as  it  could  not  be 
envisaged,  for  internal  market  reasons  and  because  of  the  de  facto  abolition  of  the 
common  VAT  system,  to  permit  only  a  few  Member  States  to  introduce  such  a 
change to the VAT system. 

A pilot would have to be organised in such a way as to offer the best opportunity to 
increase  the  knowledge  about  how  a  reverse  charge  works,  while  at  same  time  not 
exposing either the Member State volunteering nor any other Member State to major 
risks. 

In this regard it is important that the Member State volunteering is an economy large 
enough to be representative but not of such overwhelming importance as to impact 
on intra-Community trade. 

A pilot would  by  definition  run  over a  certain  period of time. Such time should be 
sufficient to obtain the necessary results and not make the costs for taxable persons 

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of changing to the reverse-charge system and the eventual cost of changing back to 
the classical VAT system disproportionate. The pilot should as a result demonstrate: 

•  To  what  extent  the  reverse  charge  really  succeeds  in  limiting  and  reducing 
existing  fraud  —  this  would  need  to  be  appreciated  both  in  terms  of  the  overall 
reduction of the VAT gap due to fraud and in respect of the types of fraud that are 
being reduced. 

•  To  what  extent  new  types  of  fraud  are  a  real  danger  and  what  are  the  most 
promising  measures  to  counter  such  risk  —  there  would  need  to  be  continuous 
assessment  of  the  development  of  different  types  of  fraud  and  the  measures  of 
control implemented to limit it, with it being clearly understood that these should 
not be measures that already show promise of combating fraud under the current 
system. 

•  The costs to businesses and tax administrations of implementing and operating the 
system and whether these costs would be proportionate to any benefit received by 
the Treasury. 

Clearly,  the  exercise  would  need  to  be  accompanied  by  a  monitoring  scheme  that 
would  make  the  whole  operation  transparent  and  provide  for  feedback  on  potential 
adverse effects on other Member States. In order to achieve a balance of interested 
parties  it  is  suggested  to  create  a  steering  group  that  would  consist  of  the 
volunteering country, the Commission and at least the neighbouring Member States. 

In the Commission’s opinion, the pilot should run for at least five years as statistical 
material to measure its effects would in any event only be available after three years. 
An even longer period might be considered as fraudsters may be hesitant to develop 
new fraud patterns knowing that the pilot would only run for a very limited period. 

The  Commission  is  prepared  to  work  out,  together  with  all  the  delegations  in 
Working  Party  No  1,  the  necessary  details  needed  to  apply  a  generalised  reverse 
charge  for  a  trial  period.  Based  on  such  work  the  Commission  could  then  come 
forward with the relevant legislative proposal. 

5.2. 

Conclusion on pilot project 

Reverse charge is a concept that cannot and should not be ruled out at this stage as it 
offers a number of undisputed advantages. However, it is a system that is so different 
to  the  one  operating  now  that  it  could  never  be  introduced  on  an  optional  basis 
without harming the objective of the smooth functioning of the internal market. As a 
decision  on  its  introduction  is  premature  in  the  absence  of  any  empirical  evidence 
concerning such a system, the Council is asked to: 

•  consider whether a pilot project should be envisaged to establish whether or 
not a reverse charge would be an appropriate response to tackle VAT fraud, 
and 

•  confirm,  should  such  a  pilot  be  envisaged,  that  the  Commission  should 
proceed with the preparatory work to allow a volunteering country to start a 
pilot project on the basis of the conditions outlined in this Communication. 

EN 

11 

   EN