What is VAT Fraud?

Compliance Knowledge Base | Fraud Awareness

Posted by: Morgan Rennie Published: Tue, 11 Sep 2018 Last Reviewed: Tue, 11 Sep 2018
What is VAT Fraud?

Value Added Tax (VAT), the vital tax on consumer spending, can be evaded through VAT fraud. VAT fraud is common, as it takes the form of a business not charging VAT when they are required to, or charging an individual VAT, but keeping the amount for themselves and not paying it to HMRC. VAT fraud is a considerable crime as it is deliberate tax evasion, and therefore the government is being deceived through this process. There are significant penalties for VAT fraud and it is important to be aware of how to comply with VAT tax properly.

How does VAT fraud occur?

VAT fraud can occur through the simplest of actions as well as through large scale co-ordinated plans to evade VAT. For example, after an electrician has completed a job at your house, they could deal with cash-in-hand which would effectively avoid VAT. Yet, VAT fraud on a large scale can consist of a European wide VAT fraud organisation deceiving a number of national governments. VAT fraud is widespread and common, thus there has been a necessary demand to crack down on VAT fraud.

What is VAT Fraud?

VAT fraud can occur across many business sectors, such as telecom and electronics, all of which are highly attractive to fraudsters. There are large wide-ranging VAT organisations which will organise VAT fraud schemes to create a profit and subsequently factor in money laundering. This type of activity can occur because there are outlets in the VAT system which allow fraudsters to pose a risk and target different sectors one after another. This process can be referred to as carousel fraud, which is in effect the process of stealing VAT from a government by an organised, well-trained group of fraudsters.

'Missing Trader' Fraud:

In 2016 the UK lost somewhere between £500 million to £1 billion due to missing trader fraud. So, what is missing trader fraud?

Missing trader fraud is related to carousel fraud which has been referenced already. However, missing trader fraud relates further to the activity of exploiting VAT within multi-jurisdiction trading, where there is a movement of goods which are VAT free. Therefore, the organised gang of fraudsters can effectively decide the VAT on the goods and receive the money from this, instead of paying the VAT charge to the relevant government.

The name 'missing trader' was created to relate to the action itself, which is in effect a fraudster going missing with the stolen VAT. This is a severe crime and the most critical form of VAT fraud that occurs.

In May 2018, the cost of VAT fraud to the EU economy reached a staggering €60 million, affecting countries such as Italy, Spain, Portugal, Germany and Belgium. The Spanish National Police, Spanish Tax Agency, Europol and Eurojust, have conducted an investigation since 2015 which has effectively put an end to the fraudulent activity conducted by a mass group. This fraudulent group were responsible for simulating imports and purchasing electronic goods, then selling these online, whilst avoiding VAT. This group became huge, encompassing around 100 companies across Europe.

What are the penalties for VAT fraud?

HMRC has established strict penalties to deter individuals and organisations from committing VAT fraud, thus penalties are established with the purpose of ensuring compliance with VAT is achieved. The penalties for an offence are decided in relation to the severity of that offence, and therefore they are proportionate. Some of the penalties which can be administered are as follows:

- Fixed-rate penalty: This is 30% of the VAT which is due, regardless of whether an organisation or an individual are aware that they were connected to fraud.

- An early payment system: This is 25% of the VAT which is due. This is when an individual or organisation have shown that they were aware of the VAT fraud which has taken place.

Regardless of the penalty, if HMRC has discovered that you are guilty of fraud, your reputation will be damaged by this as they will make sure individuals and organisations that are guilty of VAT fraud are known for it.

In October 2017, parliamentary critics of HMRC branded HMRC as too cautious and slow in cracking down on VAT fraud. For example, it has been alleged that eBay have been benefitting from VAT fraud online, contributing to a loss to the UK's purse.

The EU are worried in general about VAT fraud as it is a considerable crime which has the potential to steal money from governments in order to fund crime and even terrorism. Therefore, VAT fraud is taken seriously, and organisations should be aware of when this has possibly taken place and the subsequent penalties which could arise from this.

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