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Friday, June 23, 2006

Not So Merry Go Round

Yesterday’s reports of the VATman impounding 60,000 Nokia 6230i’s and last week’s reports of the jailing of Mark Selby for 6 years for Carousel Fraud exposes how the practice is totally out of control and is distorting the UK and probably European market for handsets. Mark Selby’s company alone sold phone worth £326.5m in a one year period to 12 UK companies and accounted for £57m in missing VAT. This is big business, run by extremely intelligent people who can afford the best lawyers and tax consultants. Gordon Brown’s team in contrast are poorly paid and under-resourced.

Carousel Fraud has been around for a long time and basically exposes a loop-hole in the VAT rules. Estimates vary on the actual of fraud going on but it has reached such epic proportions that it is distorting the UK macroeconomic picture.

The reason that criminals target the UK mobile sector is that the phone itself is relatively small compared to its’ value (therefore cheap to transport) and more importantly the UK market has an extremely wide distribution chain with lots of intermediaries who are working on razor thin margins. If the average wholesale margin is about 2% and you avoid paying VAT of 17.5%, it is pretty obvious that you have a great advantage in the mobile bazaar. The other important factor in the UK market is that the end-user doesn’t care whether VAT has been paid on the handset or not. When a retailer has an exclusive on hot selling equipment, do distributors really have the time to investigate the “grey market” equipment they are buying to break the "exclusive" has had the VAT paid in full? (As an aside, LG had a great solution for the "grey marketeers" of the Chocolates) How many eBayers care whether VAT has been paid or not? Everyone just wants a cheap deal, it is not the end-users fault that the VAT system was designed by morons.

So what is the solution? Obviously Her Majesties Government is working on a fix, but the attempts are akin to putting their fingers in the dyke and the EU courts keep overruling any HMRC actions anyway. What is needed is a radical re-engineering of the VAT system throughout Europe.

In my opinion, what is needed is an electronic version of the duty paid stamp now featured on spirit bottles. Furthermore, the MNOs could gain a few Brownie points in the process by refusing to connect any equipment to their networks which doesn’t bear the VAT paid stamp. It would also have the added bonus of improving the MNOs control over the value chain and improving still further negotiating tactics with the handset providers.

Of course, the biggest flaw in the scheme is the UK government is completely useless at implementing any technology and would probably cock-up the scheme, but that is another story…