Shocking Cost of VAT Fraud

09 January 2013

Simon Bevan (partner at BDO) has named Missing Trader and Carousel fraud as the two types of serious VAT fraud committed by professional criminals.

Missing trader and carousel fraud is the theft of VAT from a government by organised crime gangs who exploit the way VAT is treated within multi-jurisdictional trading where the movement of goods between jurisdictions is VAT-free. The fraudster charges VAT on the sale of goods, and then, instead of paying this over to the government's collection authority, he simply absconds, taking the VAT with him. The term "missing trader" refers to the fact that the trader goes missing with the VAT. "Carousel" refers to a more complex type of fraud in which VAT and goods are passed around between companies and jurisdictions.

BDO’s FraudTrack figures depict tax fraud on the whole as accounting for nearly half (44%) of all fraud reported in theUK. The UK VAT gap is around £10bn, with fraud accounting for about one third of this. This is an EU-wide problem with the 27 member states having a combined VAT gap of €100bn (£81bn).

If a third of the UK VAT gap is due to fraud, that equates to £3.3bn missing from the public purse every year - equivalent to at least 1 pence off the effective rate of tax for every UK taxpayer, BDO said.

It is thought that approximately half of the £3.3bn figure related to general non compliance due to mistake or deliberate act by legitimate traders while half is produced by a relatively smaller number of professional fraudsters committing Missing Trader Fraud and Carousel Fraud.

Said Bevan: ‘Anecdotally we are hearing that Missing Trader and Carousel fraud is proving difficult and time consuming to prosecute and is now not a main focus of CPS policy; we think this is a false saving. In recent years both the Germans and the Dutch have allocated resource to this issue and now suffer proportionally much less professional VAT fraud than other member States. If we focus on serious VAT fraud – and resource HMRC accordingly - we can immeasurably improve the public purse in a relatively cost effective manner.’

Bevan said that politicians and the public at large are presently pointing their finger at various multinationals for allegedly not paying the correct amount of corporation tax.

‘However, our latest survey of UK fraud shows that, in reality, it is the fraud element of UK’s VAT gap - the theoretical difference between what the government expects to collect in sales tax and what it actually collects - that is the bigger drain on the public purse,’ he said.

Mike Fleming, a former HMRC inspector, said: ‘In August 2012, HMRC published details of its ‘most wanted’ tax fraudsters. Between a mere 20 individuals, the amount of tax unpaid totalled £¾ of a billion. Compare this to the deficit created by tax avoiders across the UK, currently £2.5bn. The amount of tax at risk from tax avoidance is dwarfed by the scale of the problem we have with VAT and other direct taxes which make up over 60% of the £35bn “tax gap”. My feeling is that HMRC’s current focus on tackling tax avoidance is political, not practical.’

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