The number of European Union (EU) member states imposing reverse-charge VAT mechanisms to prevent sales tax fraud in the scrap metal sector could rise, with EU ministers allowing governments to use these systems without permission from Brussels.

The EU Council of Ministers has approved amendments to the EU’s VAT directive 2006/112/EC, enabling member states to force suppliers to pay VAT, rather than final consumers, when faced with a sudden onset of large-scale VAT fraud.

Crucially, member states will not have to ask permission from the EU Council and the European Commission to derogate from existing EU VAT laws (which preclude reverse charges), a process that can take months.

“Fraud schemes evolve rapidly, giving rise to situations that require a swift response,” a council communiqué said.

Until now, amendments to the VAT directive (2006/112/EC) or special rights for member states have been required.

“Both require a proposal from the EC and a unanimous decision by the council, a process that can take several months,” the note said.

Under the new law, member states can impose reverse-charge VAT on sales of raw and semi-finished metals, and a limited range of other products and services, including mobile phones, integrated circuit devices, and supplies of gas and electricity.

Reverse-charge mechanisms imposed under this new system would last until December 31 2018, when member states would have to ask the EC and the EU council to extend these rights. 

The absence of a reverse-charge VAT collection system in some member states (such as the UK) makes scrap traders exposed to VAT fraud. This is especially problematic in border-free customs unions such as the EU. 

For instance, there were recent scrap metal VAT scandals in Hungary, the Czech Republic and Slovakia which caused tax losses in Britain, because these eastern European countries use the reverse-charge system, while Britain does not (for scrap metal). 

Keith Nuthall