Strategic Approach to Tackling VAT Losses - Case Study Example

Taxation Total word count: 1915 In your case you have been approached by a man with a proposal of selling some goods to you which are imported from other EU member state. This scenario can be shown in the exhibit-1 given below. Here you are offered a proposal by a man B who imports goods worth, say 1,000,000, from a supplier 'A' in EU. Exhibit-1 Let us analyze the proposal in terms of various benefits and pitfalls associated with it. Let me start with the benefits, that this proposal can give you. BENEFITS AND LIMITATIONS: - From the marketing point of view this proposal seems to be much profitable and worth accepting one. The reasons on the basis of which we can say that are obvious and can be summarized as given below: 1. As you have mentioned in your case, it is going to be very easy for you to purchase goods from the Man B who will himself import them from Europe. That means you do not have to worry about importing them. You also do not need documents which are necessary for importing goods. 2. The other reason why you should accept the proposal is that you do not have to worry about finding the market for your goods as you can sell the goods to other trader in the UK itself. These reasons are enough for you to accept the proposal given to you. But before coming to any conclusion let me caution you that there can be some limitations in the proposal which need to be taken care of. The most important hindrance in your way of accepting the proposal can be what is termed as the 'carousel' or 'missing trader fraud'. Now what is this 'carousel' or 'missing trader fraud' all about For explaining this, we need to elaborate further the exhibit-1. We will get a different picture which is shown in exhibit-2(Andy Leggett, 2006) given below. The MTIC fraud is explained below for your convenience. Before I can tell you something about carousel fraud and its various implications, let us have a look at missing trader intra community (MTIC) fraud because carousel fraud is a type of MTIC fraud. In MTIC fraud, a trader imports goods to one state (say UK) from EU member states without paying VAT and sells these goods to other trader after which the first trader goes missing. The first trader, however, has to pay the VAT. This type of VAT fraud was highlighted in November 2001 in the HM Treasury and HM Customs and Excise paper, Tackling Indirect Tax Fraud, Exhibit-2 that was published as part of the 2001 Pre-Budget Report. In this paper, MTIC fraud was described as follows: "VAT intra-Community missing trader fraud is a systematic criminal attack on the VAT system, which has been detected in many EU Member States. In essence, fraudsters obtain VAT registration to acquire goods VAT free from other Member States. They then sell on the goods at VAT inclusive prices and disappear without paying over the VAT paid by their customers to the tax authorities. The fraud is usually carried out very quickly; with the fraudsters disappearing by the time the tax authorities follow up the registration with their regular assurance activities." Thus in this type of fraud, a trader can disappear easily without paying VAT which means a loss for the states' economy. This fact is shown in the exhibit-2 below. In this exhibit it can be observed that there is a tax loss of 157,500 due to non payment of VAT by Trader B. One important thing to be mentioned here is that Intra-EU trades in goods statistics rely on the VAT forms which are a correct record of trade transactions. MTIC fraud affects the measurement of trade in goods through the role of the missing trader. There are two types of MTIC fraud. These are acquisition fraud and carousel fraud. Acquisition fraud is where the goods are imported from the EU into the UK by a trader who then goes missing without completing a VAT return or Intrastat declaration. The 'missing trader' therefore has a VAT free supply of goods, as they make no payment of the VAT monies due on the goods. He sells the goods to a buyer in the UK and the goods are available on the home market for consumption. Carousel fraud is similar to acquisition fraud in the early stages, but the goods are not sold for consumption on the home market. Rather, they are sold through a series of companies in the UK and then re-exported to another Member State, hence the goods moving in a circular pattern or 'carousel'. In exhibit-2, The UK Trader B imports goods from the EU supplier A. Trader B should pay VAT on sales to Trader C and fill in a VAT return. But as soon as the transaction between Trader B and Trader C takes place, Trader B ceases operation without paying VAT and hence not filling in VAT forms. Without the VAT form there is no record of the transaction for UK import statistics. The carousel then involves various traders selling the goods on (in this example, C and D) until the goods reach Trader E. Trader E exports the goods to non-UK Trader A; Trader B imports them again from Trader A, and the carousel continues. Here we are concerned about carousel fraud only, so let us leave the acquisition fraud. Now after giving you a brief description of the missing trader fraud let me tell you how customs and excise incur losses due this fraud. Talking about UK, the statistics show that due to carousel fraud, the customs and excise has to incur a loss of about 1 billion every year. Not only this but also the balance of trade of the UK is affected by such a type of fraud. This can be explained again by the exhibit-2 given above. In the exhibit, the transaction of the UK exporter E will be recorded alongside his VAT return because insufficient evidence of export would result in the exporter being required to charge and account for VAT on his onward sale. The VAT system (and therefore the Intrastat collection of trade statistics) picks up the exports of any 'carouselled' goods, but does not pick up the associated import at the time the carouselled goods entered the UK. The balance of trade, exports minus imports, is therefore overstated. Hence there is a trade imbalance in the economy of UK. . The case with you is the same. If you agree to the trader's proposal, you may be caught in the net of carousel fraud. You are asked to get involved by accepting the proposal. Relating your case with the exhibit-2, your company can be compared with Trader C and the man with the proposal is Trader B in the exhibit. CONCLUSION The proposal shown to you can be only half of the picture in which the major loophole may have been kept hidden. Like we saw how Exhibit-1 can be deceptive if we do not see the complete picture as shown in Exhibit-2. I do not mean that the proposal is definitely a fraud but what I want to suggest is that you should first see all the dimensions of the proposal before accepting it. You may be right in suspecting that there are some hidden tax implications in the proposal. How being a part of carousel can harm you If your proposal really comes out to be a part of a carousel fraud, you may have to face the brunt of HMRC. HMRC have sought to mitigate the losses it suffers through MTIC fraud by seeking to disallow input tax claims from traders who are further down the chain of supply. Even if you are unaware of being a part of carousel, you may not be left without punishment as it was observed in the cases of The Optigen, Fulcrum and Bond House. Whilst it was accepted that none of the companies had any knowledge of it, the goods which they had bought and sold had been supplied through missing traders further up the line (in fact none of the companies dealt directly with any missing trader but were at least one transaction removed from them). The Commissioners of Customs and Excise declined claims for input tax in the case of each company on the basis that since the chains of supply involved sales by missing traders as part of a carousel fraud the supply chain when viewed as a whole (as opposed to looking at the individual transaction entered into by each of the companies) was devoid of any economic substance and therefore fell outside the scope of VAT. HMRC refusal to allow claims for input tax is based on an argument that purchases and sales made in the course of the operation of a carousel fraud are devoid of economic substance and are not part of any "economic activity" as defined by Article 4(2) of the Sixth VAT Directive (77/388/EEC). Moreover, by helping the carousel to complete its cycle, you are helping the fraudsters to evade VAT and thus destroying your own state's economy. As already mentioned HMRC has to bear huge losses due to missing traders not paying VAT. From the above facts it is clear that being a part of a carousel fraud can affect you and your business. Thus you should take extra care while accepting the proposal. There are various ways by which you can check whether the proposal offered to you is a fraud or not. These ways are summarized in the next section below. How you can avoid getting trapped HM Revenue and Customs has shifted the burden of losses from its shoulders to the traders'. It has refused to deal in the repayments where a carousel fraud is found anywhere in the chain of transactions. However you have to play a part in saving yourself from getting trapped. There are a number of safeguards that you can implement to reduce your exposure to carousel fraud. These can be as given below (Finance law elert, 2006) Obtain information about your supplier i.e. the man who offered you the proposal and also the supplier in the EU. You should also know to whom you are selling your goods. This information should be obtained in respect of whether the supply is being carried in a carousel in these traders only or not. Look at the entire supply chain. Are the goods imported by the Man A again being exported If yes then it is a carousel fraud. Verify the VAT registration number of Man A and also the company B. The simplest missing trader fraud is where no VAT return is completed. Check that returns are being made by the man supplying you the goods. Check with HM Revenue and Customs that the VAT registration numbers are valid. Look at the products involved. The majority of carousel frauds involve mobile phones and computer chips: high value, easily transportable products. Conduct regular checks of the company B for inventory and sales and see that the goods are really purchased. Check that the goods are not fictitiously purchased. Thus according to above suggestions you can check the proposal for carousel fraud and save your company from damages.Therefore, we must say that you should analyze the proposal given to you before accepting it. This is necessary to avoid the hassles of missing trader fraud. References Leggett, Andy, (2006), VAT Fraud & Control of Refunds and Credits A Strategic Approach to Tackling VAT Losses. Retrieved on 17th, April 2006 from< www.itdweb.org/.../Parallel4_VAT%20Fraud%20&%20Control%20of%20Refunds%20&%20Credits_ALeggett.ppt > Ruffles, David; Tily, Geoff; Caplan, David & Tudor, Sandra, (2003, August), VAT missing trader intra-Community fraud: the effect on Balance of Payments statistics and UK National Accounts. Retrieved on April, 17, 2006 from Finance law elert, (2006), Carousel Fraud: going round again. Retrieved on April, 19, 2006 from < www.hammonds.com> Mayo, Simon, (2005), The magic roundabout. Retrieved on April, 19, 2006 from < http://www.crimeline.info/issue157.htm> Ruffles, David & Williams, Tricia, (n.d.), Report on further research into the impact of Missing Trader Fraud on UK Trade Statistics, Balance of Payments and National Accounts. Retrieved on April, 16, 2006 from Read More