What is VAT fraud?
‘Measuring Tax Gaps’ describes fraud as ‘the deliberate, dishonest evasion of VAT’. The many ways in which VAT can be evaded are briefly set out at in VATF21000, and some examples are looked at in more detail in VATF23000.
In the judgement of the House of Lords in the case of Total Network SL ( UKHL 19) Lord Hope of Craighead, in relation to Missing Trader Intra-Community (MTIC) carousel fraud (VATF23500), stated:
The fraud is the product of a dishonest application of the system of value added tax …
As the Court of Appeal observed …, this type of fraud is not confined to the United Kingdom. It is common in other countries within the EU. It has been described as a sophisticated attack on the VAT system … There is no doubt that this is a pernicious stratagem, and that member states are justified in making use of every means at their disposal within the scope of the Sixth Directive to eradicate it.
The opportunity for, and incidence of VAT fraud depends on the interaction of several factors.
- The scope for fraud: VAT is a self assessing tax with multiple liabilities, which is reliant on the setting off of inputs and outputs until the product reaches the final end consumer. These can, and have been manipulated in order to make a fraudulent gain.
- Identification of the scope/model: VAT frauds can operate in wholly artificial markets, such as MTIC carousel fraud (VATF23500), or in an established market, such as labour provider fraud (VATF23600). No trading market, be it in goods or services, or business type, be it big or small, is immune from VAT fraud.
- Cost: The more sophisticated and contrived the fraud, the greater the costs of organising it. For example, a simple suppression fraud (VATF23200) will usually involve no more than one taxable person, who will suppress his purchases and/or sales. On the other hand, a fraud such as MTIC carousel fraud will involve the participation of a large number of individuals taking on a large number of roles, all of whom must be paid from the benefit of the fraud.
- Potential gains: The greater the gain from fraudulently manipulating the VAT system the greater the risk fraudsters will be prepared to take.
- Risk of detection: The greater the risk of detection the greater the deterrent effect on the fraudulent behaviour.
- Risk of consequences: The greater the risk for the fraudster of HMRC being able to ‘penalise’ those involved in the fraud, the greater the deterrent effect.
It is important that if you discover a taxable person who you believe is involved in VAT fraud you should contact the VAT Fraud Team.