Missing trader fraud

Missing trader fraud (also called missing trader intra-community or MTIC) and the related carousel fraud is the theft of Value Added Tax (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. This allows the fraudster (person who commits fraud) to charge VAT on the sale of goods, and then instead of paying this over to the government's collection authority, to abscond, taking the VAT with them. This is termed "missing trader" as 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, similar to how a carousel revolves.

Carousel fraud, explained by the Dutch State (click to enlarge)

European Union

In the European Union (EU) the European Union Value Added Tax ("EU VAT") allows merchants to not charge VAT on the sale of goods sold to buyers in another member state.

Figures released in September 2006 by Eurocanet, a project sponsored by the European Commission, appear to show that the United Kingdom is the main victim of this fraud – the UK lost an estimated €12.6 billion during 2005–06 – followed by Spain and Italy, which each lost over €2 billion.[1] From 1 June 2007 the UK introduced changes to the way that VAT is charged on mobile phones and computer chips to help combat fraud.[2][3] UK plans to introduce changes to the way VAT is charged on a wide range of goods from December 2006 were aborted because of failure to reach an agreement with other EU member states.

Operation of the VAT system

In brief, a business that buys and sells goods charges VAT to those to whom it sells ('output tax'), and is charged VAT by those from whom it purchases ('input tax'). It can reclaim (subject to various rules) the VAT it pays, and so passes to the Government the net VAT it collects (being output tax less input tax). In this way, a business acts as a tax collector on behalf of the Government.

Within the EU VAT, member states charge VAT at differing rates on goods as a form of indirect taxation. All exports of goods however are tax free. This leads to the situation where an exporter will be able to reclaim VAT from the Government, as it will have been charged VAT by the business from which it purchased the goods, and will owe the Government nothing because it has sold the goods tax free.

Operation of the fraud

The fraud exploits this reclamation of tax. It lends itself to small, high value items, such as microchips and mobile telephones.

Missing trader fraud

The simplest missing trader fraud is where a fraudster imports some goods that are zero-rated in the country of origin; VAT on the goods should be paid in the country into which they have been imported. After importing, the fraudster sells the goods to another trader, charging the price of the goods plus VAT, but does not pay the VAT collected to the Government; he becomes a "missing trader". The buyer, who has paid the VAT to the fraudster, can then reclaim the VAT paid from the VAT authorities on his VAT return. Afterwards, the same goods are zero-rated for export. This way the government has lost all the VAT that should have been paid on the goods, rather than the fraction of it that would be paid for just one stage of the production process—this lesser situation, where the goods are made available for consumers in the importer's home market, is often known as 'acquisition fraud'.

The imported goods may be sold from one trader to another, and eventually exported. When this happens, the exporter can claim back from the government all the VAT that should have been paid on the goods (as exports are zero-rated). However, if there is a "missing trader" further back in the chain of sales, part of this VAT would never have been paid in the first place. Hence, there is a loss to the government.

This can repeat many times, with the goods going round as if in a 'carousel'.

According to a 2018 EU Parliament study carousel fraud is the most damaging type of cross-border VAT fraud with €50 billion losses on average per year.[4]

Example

Trader A is based in Slovenia, a member-state of the European Union. He buys a consignment of mobile telephones from a seller in France, another member-state of the EU. Trader A pays the French seller 1,000,000 EUR for the goods. The goods are shipped to Slovenia. No VAT is charged by the French seller on that shipment because of intra-community trade rules.

Trader A now sells those telephones to Trader B also in Slovenia, for 1,100,000 EUR plus 20% VAT (220,000 EUR). Trader B pays 1,320,000 EUR to Trader A.

Trader B then sells the goods to Trader C, still in Slovenia, for 1,200,000 EUR plus 20% VAT (240,000 EUR). Trader C pays 1,440,000 EUR to Trader B.

The French seller may well be honest, but Traders A, B, and C are conspirators in the fraud. This may continue for many conspirators to better conceal the initial transaction; however, three will suffice for an example.

Trader C now sells the telephones to a German company, which may well be honest. No VAT is charged on intra-community trades, so the German company pays 1,500,000 EUR free of VAT.


So far the three conspirators have made altogether a legitimate profit of 500,000 EUR on buying the mobile telephones for 1,000,000 EUR and selling them for 1,500,000 EUR.

In an honest operation, Trader A should hand over the 220,000 EUR it collected from Trader B to Slovenia's VAT collection agency. But they keep the money.


Trader B paid 220,000 EUR in VAT to Trader A but collected £240,000 in VAT from Trader C, so they hand over only the difference, 20,000 EUR, to Slovenia's VAT collection agency.

Trader C paid 240,000 EUR in VAT to Trader B and charged no tax on its sale abroad, so they reclaim £240,000 from Slovenia's VAT collection agency.


In the fraud, Trader A vanishes without handing over the 220,00 EUR in VAT. When the last business in the chain collects the reclaimed VAT, all the conspirators can vanish with the 220,000 EUR. As the VAT reclaimed is not directly connected with Trader A, it is difficult for Slovenia's VAT collection agency to follow the links in the chain and justify refusing to refund the VAT on the intra-community sale.

Each business described above is called a "buffer". In a real case there can be many buffers, all helping to blur the link between the final reclaim and the original importer, which will vanish. In addition banks are used to make third-party payments. These obscure banks are called "platforms" and work on the escrow principle. This means money is uploaded and transferred immediately through the client accounts; it takes a day for the money to come out of the platform. The biggest platform was offshore First Curaçao International Bank (FCIB), which was closed by the Netherlands authorities in 2006. Using offshore platforms means that authorities cannot trace the money until they inspect books, and as the missing trader has already fled they cannot trace where the money was routed.

This entire series of transactions can occur without the goods ever leaving France before being re-exported. Furthermore, the same goods can go through the various buffers again and again, each pass around the 'carousel' bringing reclaimed VAT to the fraudsters.

Contra-trading

Contra-trading fraud is the further evolution of carousel fraud, and evades government detection by using two carousels of traded goods where one carousel is legitimate and the other is not thereby allowing an accounting scheme where the input and output VATs neutralize each other thereby concealing the fraud.[5] Jaswant Ray Kanda, of Sutton Coldfield, Birmingham, and his gang were key players in this type of carousel fraud.[6] Customs Officials who were investigating them called their operation Maypole as they had clear evidence that Kanda and his gang sent the same lot of goods round and round again.

"Innocent parties" – the 'Bond House' decision

Although the example above referred to all the links being co-conspirators in the fraud, according to a decision in the European Court of Justice it is possible that innocent parties also become involved by simply buying and selling on goods. If it is the first party in the chain who is the absconding fraudster, the goods can continue to be sold-on by innocent parties.

In the UK, the position until 2006 was that HMRC withheld VAT repayments to others later on in the chain, on the basis that the transactions were lacking in economic substance and so should be outside the scope of the VAT regime.

Bond House Systems Limited was one such "innocent trader", who was owed £13,200,000 in VAT repayments by HMRC. It challenged the UK Government's stance, taking the case eventually to the European Court of Justice. In January 2006 the ECJ in the joined cases C-354/03, C-355/03 and C-484/03 found in favour of Bond House and ordered that the VAT owed to Bond House be repaid by HMRC. It was estimated that the decision would cost the UK government hundreds of millions of pounds as other companies make their claims.

Cost of the fraud

According to the case Federation of Technological Industries v Customs and Excise Commissioners [2004] EWCA Civ 1020 in 2002–03 the estimated cumulative cost of such frauds to the UK alone was between £1.65 and £2.64 billion (US$2.9 to $4.62 billion).

According to the BBC, "So-called 'missing trader' or 'carousel' fraud is estimated to cost European governments up to £170bn a year – twice the European Union's annual budget."[7] The fraud has evolved and now may involve any high value goods, such as designer goods, health products, jewellery etc.

References
  1. Oliver, James (2006-09-22). "VAT scams hit UK taxpayers hard". BBC News.
  2. "Clampdown on VAT fraud". BBC News. 2006-09-18.
  3. "New anti-fraud VAT rules come in". BBC News. 2007-03-19.
  4. "VAT Fraud" (PDF). European Parliament TAX3 Committee. October 2018.
  5. Olympia Technologies Ltd. VAT Tribunal #20570 (2-15-08)
  6. "£54 million VAT fraud gang is jailed". Birmingham Mail. 2007-01-08. Retrieved 2008-11-21.
  7. Phil Kemp (2008-10-04). "Fraudster's 'pop star' lifestyle". BBC News.
This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.