During the past decade a substantial amount of value added tax (VAT) has been stolen from HM Revenue & Customs (HMRC). One of the most popular methods used by the fraudsters has been the Carousel Fraud. Also sometimes called the Missing Trader Inter Community fraud, it has been responsible for many billions of tax lost to HMRC. It is impossible to estimate the full extent of the fraud as it is only those that have been discovered that can be counted.
At the outset, the Carousel frauds were conducted using computer chips and mobile phones. These were goods that were both small and valuable. This allowed a big volume of financial transactions without the cost of a relatively large business infrastructure. Very often there were no products at all, with 'fresh air' invoices being raised for thousands of mobile phones which did not exist. At one stage the amount of VAT being reclaimed by 'mobile telephone traders' was many times more than represented by the mobile phone industry in total.
To combat the massive frauds that were getting seemingly out of HMRC's control, a reverse VAT charge on computer chips and mobile phones was introduced in the UK on all transactions after 1 June 2007. The rest of Europe was making a similar provision and VAT fraud on these specific items immediately stopped.
However, the clever fraudsters switched their attention to other products that they could trade and obtain VAT repayments illegally for. The crooks were commiting this fraud using any goods that could be traded between European countries. The fraud was also being perpetrated with goods that were traded between the UK and countries farther afield such as India and Pakistan. In this case import/export duties were the subject of the taxation fraud.
It was recently in 2009 that the authorities realised that the trade in the relatively new 'carbon credits' were being targeted. In 2008 the market was already worth £80 billion and growing rapidly. As they have no substance, being an agreement or allowance, they fitted the requirements for circulation by the VAT fraudsters. Therefore, from midnight on 30 June 2009 suppliers of such carbon credits became subject to a zero rate of tax in an attempt to remove these goods from the carousel fraudsters grasp.
The problem is that the fraudster will trade any high value item in an attempt to recover tax illegally. The authorities have stopped such trade in computer chips, mobile phones, and now carbon credits. But consider the multi £billion value of the spectacles trade, or trade in certain pharmaceuticals or remedies. VAT fraud has been encountered on clothing, furniture, fabrics and even on English-Arabic dictionaries! The only way to stop VAT fraud is to completely remove the framework that allows timing differences between the recovery and payment of VAT on the same goods by the different parties - and to apply the changes to all different commodities.
Author Resource:
Mark Jenner is an experienced forensic accountant and fraud investigator. He works for the police, government fraud authorities and victims of fraud obtaining accounting evidence in diverse fraud cases. He is a Fellow of the Institute of Chartered Accountants, a Certified Fraud Examiner and holds a Masters Degree in Fraud Investigation Management.
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