Missing Trader Intra Community Fraud (VAT Carousel Fraud)

Value Added Tax or VAT as it is more commonly referred to is an indirect taxation of the goods and services that we all have to buy.  As a percentage of the sales value, some 17.5% in the UK rising to 20% in 2011, it represents many billions of revenue for the tax authorities.  Yet in recent years it has been a prime target for the fraudsters.  As with any fraud, it is not possible to say exactly how much revenue is being lost at any particular time, certainly the authorities are loath to admit the full extent of the amounts stolen from them.  Some commentators put the losses to the European economy in the range of several hundred billion pounds every year – yes a multiple of £100,000,000,000! Most agree that the loss to the UK revenue exceeds £10 billion per year.

As a result of this massive problem, the authorities have stepped up their fight against it, with specialist teams within HMRC investigating and prosecuting this area of fraud. The effort that they are now putting into VAT fraud means that their conviction rates have increased such that they are higher than the average for general criminal cases.

There has been much written on the subject of VAT fraud, particularly Missing Trader Intra Community fraud – but what is it?  Put simply, it is an opportunity for fraudsters to default on massive sums of VAT owed to HMRC, sometimes created by fictitious trading.  The system of VAT involves a trader charging VAT to customers that they sell to.  Those customers in turn charge VAT to their customers, while offsetting this with the VAT they pay to suppliers.  Thus, in normal business the tax is on the profit element of a trade (for the traders) with the end user paying VAT on the whole purchase price.

The problem arises at the start and end of any chain of trading activities – and is a result of the concessions that arise within the European Community that remove the need for VAT obligations to arise between member states.  A fraudster can exploit the system in the following way:

A company in Spain has a batch of goods to sell – these are sold to an importer in the UK. The UK importer sells the goods to another UK company who then re-exports the goods to Hong Kong. The UK importer buys the goods from Europe free of VAT. He adds VAT within the UK to his invoice when he sells to the next UK company. The second UK company must pay this VAT to the importer as part of the transaction. The second UK company now re-exports the goods free of VAT abroad – either to Europe or the rest of the world.

If this series of transactions was legitimate, the VAT charged by the importer to the second UK company would be paid over to HMRC. The second UK company would then reclaim this VAT back itself. These would be the only two VAT transactions and they would cancel each other out as far as the authorities are concerned. Because the goods were imported then exported, there would be no net VAT benefit to the UK authorities who are only collecting the tax on the basis that it is on the goods and services that are used within the UK.

However, if the importer defaults on paying the tax – by disappearing or becoming insolvent – yet the second UK company still collects the tax it has paid to the importer, the UK tax system will be out of pocket.  This is at its simplest how MTIC frauds work. In practice, the goods may go through a chain of many buffer traders within the UK, or the goods may be fictitious in the first place. There are many more complex variations on the fraud, which essentially targets the huge amounts of VAT that are payable on goods and services.

Mark Jenner & Co has experience in dealing with MTIC VAT frauds for both the fraud regulators, for companies targeted by HMRC for extended verification procedures and for white collar crimes being prosecuted for the fraud.  The problem seems to have been that the fraud was very easy to commit on a vast scale. Fraudsters realised that if they claimed some fictitious VAT they could get away with it and developed various different schemes for doing so. Then they realised that there was little need for any effort – simply make the fictitious transactions bigger!

The classic badges of MTIC fraud seem to be a small company that within a year or so is turning over many £millions.  During an enquiry for Companies Investigation Branch recently it could be seen that the target company was trading with various other companies that showed this phenomenal growth – for example a company set up in one year had a turnover of £50,000.  The next year the turnover reached £1,200,000 and the following year £13,500,000.  It is very unlikely that any company could show this sort of growth naturally – but if you are fabricating the invoices, why not?  Many companies investigated by HMRC for VAT fraud that were supposedly turning over many £tens of millions  each month turned out to be nothing but a computer in the culprit’s bedroom!

The problem that HMRC had during the early part of the decade – i.e. around 2000 to 2006, was that there was a massive growth in the mobile phone business. MTIC fraudsters like mobile phones because they are small and valuable – and can be traded without warehouses and other serious logistics. Within the “official” trade between manufacturers and approved distributors, a substantial “grey” market in phones also grew.  This was a legitimate business in itself, but was quickly exploited by the fraudsters until the size of the “grey industry” was apparently bigger than the total global trade of mobile phones altogether.  When HMRC realised how big their losses probably were, with typical traders claiming back £10/£20 millions and more each month in recoverable VAT, in 2005 and 2006, they simply stopped any repayments pending “extended verification enquiries”.  This probably meant that a number of legitimate traders suffered, but the fraudsters were in a position whereby they could not trade any more until they had been properly investigated by HMRC.  These investigations turned into criminal enquiries in many cases, and the UK courts are still seeing prosecutions dating back to this time being processed.

The authorities attempted to curb abuse of VAT fraud in this way by reversing the VAT charge on certain goods.  This means that the buyer not the seller pays the VAT on the trade of typical MTIC goods such as mobile phones and computer parts.  HMRC’s information sheet VAT 08/07 provides information regarding the payment of VAT in relation to these products.  The trouble was that the tenacious fraudster simply switched his attention to different goods, that still were accounted for in the old way – these could include any goods that are traded – but in order to build up big profits, the VAT thieves always will look at high value easily moved items that can be dealt with without the need for substantial business infrastructures – certain pharmaceuticals/cosmetics, spectacles and associated products, high value spirits and even trading in carbon credits have all been targeted by the fraudsters, together with any other product that can be traded and exported – including clothing, furniture, household products, fabrics etc etc.

The only secure solution would appear to be a complete change in the VAT system.

Examples of Mark Jenner & Co cases:

  • Acting for the regulators – we acted as external investigators for Companies Investigation Branch in a matter involving many trading companies throughout the UK. The investigation was carried out on a number of companies forming a “web” of inter-trading. A characteristic of the companies was that many were new start-ups that demonstrated phenomenal growth over a short number of years – clearly faster growth than was expected for legitimate companies. The investigations carried out resulted in around ten companies being wound up.
  • Acting for defendants – we acted for companies accused of being involved in carousel fraud. Although there was an element of the fraud being conducted, there was also substantial legitimate trading that could be demonstrated from the accounting records.
  • Acting for a company in dispute with HMRC – we have provided expert evidence in protracted cases of “extended verification” where traders have obtained repayment from HMRC of tax that was due but witheld due to the overwhelming growth of VAT fraud in the early 2000’s
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About Mark Jenner

Mark Jenner is an experienced forensic accountant specialising in fraud and white collar criminal matters. He provides independent financial investigation and expert accounting witness services to police forces, fraud regulators and criminal defence lawyers, also providing assistance and solutions to organisations embroiled in financial disputes.

One Response to Missing Trader Intra Community Fraud (VAT Carousel Fraud)

  1. richard.asquith@avalara.com'Richard Asquith says:

    Hello

    I am looking for help on VAT fraud in the phara industry. Do you have any experience?

    Regards

    Richard
    VP Global Tax
    Avalara

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