Carousel fraud costs HMRC £2bn in VAT revenues

Despite an HMRC-led crackdown on VAT losses, ‘carousel fraud’ is still
producing an annual loss of up to £2bn.

The latest annual report from the department shows the initiative has reduced
the estimated loss to between £500m and £2bn ­ ‘a significant improvement’ on
the last year, according to HMRC.

Carousel fraud, also known as missing trader intra-community (MTIC) fraud,
typically occurs when a company based in another EU country sells computer chips
or mobile phones to a UK VAT-registered company. VAT is not charged on the
purchase but the fraud occurs when the buyer sells on the goods ­ either in the
UK or EU ­ and disapears before settling the VAT liability with HMRC. Goods can
often go round many times in this way in just a few months.

HMRC introduced a ‘reverse charge’ accounting policy for VAT in June 2007,
with the agreement of the European Commission, to combat carousel fraud, which
they say is ‘helping to keep fraud-related trading at very low levels.’

VAT advisers agree that HMRC have been ‘doing a good job’ in clamping down on
this type of fraud but, according to Marc Welby, VAT partner at BDO Stoy
Hayward, they ‘have not had the degree of success that they would have wished
for.’

‘It’s fair to say that this is on [HMRC’s] list of priorities,’ Welby says.
‘They have been targeting all businesses involved in a carousel fraud, whether
knowingly involved or not, seeking to collect VAT where possible. However, HMRC
have suffered some unfortunate reversals in court tribunals. It’s a very
difficult tightrope they have to tread.’

One of the problems HMRC is facing is that criminals are using increasingly
more creative means to defraud the tax authorities. Alan Sinyor, head of VAT at
Berwin Leighton Paisner, explains: ‘There are other methods fraudsters are using
in order to develop more robust ways of cheating HMRC.’

One such method is to move away from trading mobile phones or computer c
hips, to trading in other commodities such as carbon-emissions permits. ‘In many
cases, it is getting even harder for HMRC to identify fraud,’ he says.

Sinyor feels that, while HMRC was doing a ‘good to very good job’, there were
a few other actions they could consider.

‘At the moment it’s all very reactive,’ he says. ‘They could be a bit more
proactive and put themselves in the minds of the fraudsters ­ they need to be
more creative in anticipating [the business area] where the next fraud is going
to hit.’

He observed there were ‘surprisingly few criminal prosecutions’ for carousel
fraud, and adds: ‘I would like to see HMRC apply the full weight of the legal
system against these fraudsters.

‘But whether we can ever get rid of this blight on the UK tax scene ­ well,
that’s a question for the future.’