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23 February 2007 - International [Europe]
VAT Fraud
In a recent ITN, we looked at UK trade figures. One of the comments made about the figures was that they are subject to regular 'revision' by the Office for National Statistics (ONS) as new information comes in. Some of that information relates to fraud and has become something of a problem to UK authorities. The activity is called Missing Trader Intra-Community (MTIC) VAT Fraud but is better known as 'carousel fraud' and it takes advantage of value added tax (VAT) rules in the European Union (EU).

The fraud seems to be mostly centred on high value goods such as mobile phones and computer chips. The fraud continues in a loop and tends to persist if those involved believe they will not be found out. The effect is that it gives a distorted picture of EU trade meaning the figures for UK trade are probably nowhere near as high as they appear to be. The cost to the Treasury in lost VAT receipts is extensive. It was estimated that in the year to March 2005, the fraud could have cost anything up to £2 billion. The fraud is thought to have begun in the late 1990s. Each time EU tax authorities try and close the loopholes the fraudsters find another one and so there are peaks in the fraud over time. For example, Dubai and Switzerland, which are outside the EU are now thought to be part of the chain.

VAT is a tax placed on the value added by businesses during the production process. Because of this firms are able claim back VAT they have been charged by other suppliers in the production process. In addition to this, there is no VAT on cross border trade within the EU which means that firms in the UK, for example selling goods to Germany, can claim back the VAT on the inputs they have used in production.

This is how the fraud works. It relies on a chain of connected firms who are all involved in the fraud. Assume a UK firm imports a batch of mobile phones from an exporter in Germany. Cross border trade, remember is free of VAT. The UK firm then sells the phones to another firm but this time charges VAT. The VAT they charge, however, is not declared to the tax authorities. There are then a number of other similar transactions which each take place with firms which have supposedly registered for VAT and selling the phones at VAT inclusive prices. These firms do not pay the VAT to the tax authorities and then simply disappear!

In some cases, legitimate firms get caught up in the fraud unknowingly. The tax authorities have tried to act on the fraud by treating all the companies in the chain as 'non economic events' and as a result refusing to pay any VAT rebate. For the innocent companies in the chain, this has hurt them badly and they took their case to the European Court of Justice.

Plans to try and tighten up on the fraud were announced last year. The new rules will mean that VAT will only be collected when the items are sold by the retailer. The changes will involve a variety of the high value goods most targeted by the fraudsters and will include mobile phones, computer chips, satellite navigation equipment, MP3 players and games consoles. It is hoped the new rules will make it harder for the fraud to be perpetrated.

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