Gordon Brown has been warned that plans to simplify VAT rules will severely impair the European Union's ongoing battle against tax fraud.
In a letter to the Prime Minister in-waiting the International VAT Association (IVA) has urged Brown to reconsider the "B2B" (business to business) proposal on Europe's escalating VAT fraud problem.
Such a plan would extend the number of intangible services - such as software or licences - that can be traded against borders VAT-free.
The British government had jumped ahead of other European states in attempting to stamp out the likes of Missing Trader Intra-Community (MTIC) or carousel fraud which cost the taxpayer £3bn last year.
But the IVA said that loosening VAT rules to offer a quick fix accounting solution to what is a growing issue "will undermine Europe's fight against VAT fraud and could further exacerbate the significant deficits which already exist in certain member states' VAT receipts."
It also added that such a move would be a slap in the face for small businesses that already face high costs reclaiming VAT on cross border European deals.
As of 1 June, computer chips and mobile phones will be subject to a "reverse charge", effectively preventing carousel fraud on such goods by accounting for VAT at the end of the supply chain.
However, concerns had already been raised that fraudsters would simply move over to goods not covered under the reverse charge scheme. For example, MP3 players could be targeted in the same way.
Last week a House of Lords subcommittee (economic and financial affairs and international trade) concluded that VAT fraud was "out of control", and suggested that the British government needed to introduce a more measured response than simply fire-fighting the situation.
The IVA, which also wrote to European finance members, recommended the adoption of "a coordinated approach" to fight VAT fraudsters and to "resist piecemeal 'solutions' that may have merits in isolation but increase overall risks associated with the movement of fraud into new areas across the EU". ®