APPENDIX 1
HELP STOP TAX FRAUD
Dear Member
RE: TAX
FRAUD "MTIC FRAUD",
"CAROUSEL FRAUD,
"MISSING TRADER
FRAUD"
I am sure that you will be aware of the recent
public comments from HMRC on the subject of this fraud (estimated
by the Treasury to cost the UK over £1 billion a year) which
has a number of names, but is most commonly known as Carousel
fraud.
Many of you will also be aware of the recent
European Court of Justice ruling which found for three UK companies
against HMRC—HMRC had refused to allow VAT Input credit
for companies caught up in the frauds.
The fraud itself involves moving goods around
a supply chain where one or more of the parties are acting fraudulently.
So for example, a VAT registered supplier of mobile phones in
France, sells taxable handsets to Mr Jones, a VAT registered trader
in the UK. This is a cross-border, zero-rated transaction.
Mr Jones then sells the goods on to another
VAT registered trader, Mr Smith, charging and receiving VAT for
the sale. Mr Jones then disappears, having failed to hand over
the VAT to the tax authorities. He is now a "missing trader".
His behaviour is certainly fraudulent, and the tax authorities
would be left out of pocket after refunding Mr Smith, who has
acted innocently in the chain. It is also an easy fraud for a
criminal to perpetrate; it requires virtually no infrastructure
or the physical signs of the carrying-on of a business, needing
little more than a telephone and a VAT-number to accomplish it.
The ECJ case was significant. It was brought
by three UK companies at the end of a supply chain, because the
HMRC refused to refund the VAT to them, even though the companies
had no knowledge of the Carousel fraud that they were innocently
caught up in.
The ECJ ruling, which was complex and should
be considered in detail, said that "The right of a taxable
person to deduct VAT cannot be affected by the fact that, without
that person knowing or having any means of knowing, another transaction
in the chain is vitiated by fraud."
There is no evidence that the clients of any
ICAS member have, as yet, been caught up in Carousel fraud, but
it is certain that Scotland is not immune to this recent phenomenon
(there are recent examples of otherwise plausible people who are
not who they claim to be) and it would perhaps be helpful for
members to remind themselves of the steps which they could take
to mitigate risk when accepting clients or more generally advising
existing clients.
Here is a short summary of simple-to-implement
checks:
Are you satisfied that it is a bona fide business
operation?
Are you satisfied that there are no concerns
regarding the integrity of the owners, directors and management
of the client/entity?
THE CASE
OF THE
VANISHING VAT
Losing your shirt is bad but losing your reputation
is worse. Derek Allen looks at warning signals of carousel or
missing trader fraud
Carousel fraud cost the UK—and that means
all of us—over £l billion last year and even more in
earlier years. MTIC—Missing trader intra-community fraud,
more commonly known as carousel fraud—is a big problem for
everyone including professional advisers and HM Revenue and Customs
(HMRC). It's a big problem because it is so easy to do—you
need little more than a telephone and a VAT number.
It works like this. Using the example of mobile
phones, an overseas VAT registered supplier called Bloggs offers
taxable handsets and sells a batch of phones to Jones, a VAT registered
trader in the UK. This is a cross-border, zero-rated transaction.
Jones then sells the phones to another VAT registered
trader, Smith, charging and receiving VAT (at 17.5 per cent).
Jones may issue a VAT invoice to Smith, so that he can reclaim
the tax. Jones then disappears, having failed to hand over the
VAT to the tax authorities. He is now a "missing trader".
His behaviour is certainly fraudulent, and the tax authorities
would be out of pocket after refunding Smith, who may have acted
innocently.
The credibility of the transactions may appear
to be enhanced if other traders can be ensnared, creating a chain
and acting as a buffer to hide Jones's fraud. At the end of the
chain the customer sells the goods as a zero-rated supply to a
registered trader—possibly Bloggs again in another member
state—and the goods keep circulating. Looked at overall,
the goods are merely a means to give structure to the transactions.
It is effectively the VAT, or purported VAT, that is the economic
driver. It is a nasty fraud that hurts everyone. It is in the
public interest to make sure that it is stopped.
Carousel fraud has reappeared as a major issue
in recent weeks because of a highly significant verdict at the
European Court of Justice (ECJ). Three companies, Bond House Systems,
Fulcrum Electronics and Optigen made a joint case against HMRC
over withheld VAT. They were unwittingly involved in a carousel
fraud. HMRC had tried to deny VAT to them, on the basis that they
were involved in "non-economiç activity, even though
the firms had acted innocently. The companies argued that this
was unfair, and the ECJ ruled in their favour.
The case could cost the government hundreds
of millions of pounds as companies that have found themselves
in a similar situation will seek to reclaim the tax. It is no
surprise that on the day of the ECJ verdict, Dawn Primarolo, the
Paymaster-General, announced that she would look at every way
possible to prevent carousel fraud, including legislation if necessary.
ICAS supports this principle and will do all that it can to stop
this fraud.
Treasury civil servants will be scrutinising
the ECJ judgement and will be interested in one line in particular.
To reclaim VAT, the test that a trader must pass, if there was
a fraud in the chain of transactions, is that they must demonstrate
that it was "...without the taxable person knowing or having
any means of knowing".
This means that clients and advisers should
do everything that they can to show that reasonable precautions
have been taken to find out about a transaction and the backgrounds
of those involved. ICAS issued a letter to members in January
with a reminder of the importance of verifying the identity of
a client—it is essential to be able to show that this has
been done.
HMRC can confirm whether a person's VAT registration
details are current and valid. It is good practice, if you have
any reasonable doubt, to check VAT registration details with the
National Advice Service (NAS) on 0845 010 9000.
Even innocent involvement in a carousel fraud could
involve loss of reputation
Carousel fraud has usually concentrated on high
value items such as electrical goods, silicon chips and LCD screens
but there is some evidence that it is now spreading to items such
as clothing. The criminals are perpetrating lower value frauds,
but more of them. Everyone must be on guard, and here are some
of the signs of which to be wary:
— goods that are well-travelled and/or
have come through a number of member states;
— wear and tear on packaging;
— suspiciously low prices;
— false VAT numbers, or a false invoice.
Carousel fraud looks as if it is here to stay.
We want to stop it. Members must be aware that if any of their
clients do become unwittingly involved in a fraudulent chain,
they should be in a position to show that they have taken every
reasonable precaution to find out about the transaction and the
people involved in it.
HMRC tries to stop carousel frauds when it considers
an application to register. If it monitors applications successfully
so that a fraudster cannot register, he cannot participate in
a fraud. But this delays the process of registration for everyone
and adds to the cost and inconvenience.
Even innocent involvement in a carousel fraud
could involve considerable loss of reputation and substantial
costs of proving innocence. Prevention is better than cure and
this article should help to alert members to the risk of getting
caught on the carousel.
Derek Allen, Director
of Taxation at ICAS
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