VAT monster rears its head: As Europe hurtles towards the single market, the nightmare of the new tax regime looms. Sarah Lambert reports

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The Independent Online
THE Brussels office of the Independent should have received a parcel last week. A set of acoustic couplers - computer hardware - ordered from England for use in Belgium. Unfortunately the material has been impounded by Belgian customs officials, who refuse to release it until a company representative pays the value-added tax due.

The inconvenience of such demands will pale into insignificance when the new European Community VAT regime, introduced as part of the single market legislation, is introduced next year.

All border controls and customs posts will be abolished from 1993. So the job of monitoring VAT payments and collecting intra-community trade statistics will fall to the companies themselves. Most people involved believe making this system work will be a nightmare.

Matters have been complicated by the political sensitivity of VAT. The original aim of the EC Commission responsible for laying down the groundwork was the harmonisation of VAT rates. This has not been possible; Britain, for example, balked at the notion of losing its zero rating on children's clothes and food. Instead rates are merely moving closer together, with the minimum level set at 15 per cent.

As a result, plans to replace the existing 'destination' system, where goods are taxed where they are imported, with an 'origin' system where VAT is charged at the factory gate, have been put off until 1997. The five intervening years will be governed by a transitional regime.

Under this scheme a VAT-registered business will pay VAT on delivery, but individuals or businesses not VAT-registered will pay it in the exporting country. Mail-order trade and high-ticket items such as boats are subject to yet another set of rules.

One multinational company admits privately to having spent dollars 2m ( pounds 1.3m) trying to implement the system, which is supposed to be operational by 1 January 1993.

The job is made all the harder because EC member states are taking their time in putting the changes on to the statute book. In Italy, Belgium and Portugal, for example, there is no information at all on how the new regime will work.

The changes will directly affect the 150,000 UK companies whose business is trade with EC countries, while another 30,000 will have to file export details. The VAT return forms are not harmonised and different EC member countries may ask for different information. New Euro- VAT numbers are required, but some countries, such as France and Germany, are only now - three months before D- day - getting round to issuing them. And not even this is simple. The EC specified the type of VAT code, but some companies have introduced different ones that play havoc with computer programs.

On top of the VAT reporting, the Commission has asked companies to provide statistical information on intra-EC trade flows. This work used to be done by customs and it will be an extra burden on companies, which must now decide how they should classify goods.

For small companies it may be necessary to hire consultants to ensure that they are complying with the law. The scale of the problem for small businesses trading in the EC is thrown into sharp relief by Sony Europe, which has 200 people developing reporting systems for VAT returns.

Mail-order companies doing a lot of business abroad may have to appoint local agents to collect VAT, which will eat into profits.

For the big companies there are huge problems in so-called triangular trade. This is when, for example, the Spanish branch of a company orders goods from Germany for delivery in France. Seventy per cent of Sony's business in Europe, for instance, involves such deals. In such cases the buyer must choose where to register for VAT purposes or risk being taxed twice.

Sony says this regulation 'will lead to registration of our reinvoicing companies just about everywhere. Even if the triangulation rules are simplified, it will leave almost no time to put them into effect'.

The Commission is doing its best to clear up the small print to make the legislation more workable. Earlier attempts to simplify procedures were thwarted by member states fearing increased VAT evasion. Some tax experts say that if the resulting compromise is unwieldly it will be the fault of poor communications between business and the various tax authorities.

There is, however, a fear in many companies that any changes implemented now will be irrelevant by 1997.

'We will have to throw away about 90 per cent of the changes we are making now, so all the work and investment will be worthless in four years' time,' said Gert Hogeweg, of Dow Benelux. He told a recent seminar: 'My conclusion is that the Commission is trying to complete the internal market in Europe, misusing companies by creating a monstrous administrative system. Do you know what the new VAT system stands for? Voluminous Administrative Tragedy.'

(Photograph omitted)