Suspected VAT "missing trader" fraud activity rose 50% in the first quarter of the year, the Office for National Statistics reported on Wednesday. The quantity of fraud is now more than five times higher than a year ago, and the ONS said it was distorting UK trade figures.
The fraud, known as missing trader intra-community (MTIC), grew so fast that 10% of UK exports are now being put down to criminal activity which may involve no goods actually being exported at all, the figures indicate.
The ONS said that total recorded exports of £59.5bn in the January to March period. Once estimates from Her Majesty's Revenue & Customs (HMRC) of MTIC fraud are removed, exports were £54bn. The £5.5bn gap is up sharply from £3.6bn seen in the fourth quarter of last year. It is more than half the £10bn total for all of 2005.
While the latest numbers are estimates, and Revenue & Customs says it is difficult to extrapolate actual VAT losses from the amount of trade it thinks might be fraudulent, the agency said that the amounts involved were rising sharply.
A spokesman said: "HMRC is fully aware that operational indicators suggest levels of MTIC activity are increasing and is responding robustly to these changing trends. However, these figures reflect attempted fraud, not VAT stolen, and it is not possible to make assumptions about losses incurred by the Exchequer. Our increased efforts to tackle the fraud are delivering results."
In 2004, HMRC estimated VAT losses of £1.1bn-£1.9bn on fraud of £3.4bn. That could mean losses of £5bn for 2005 and double that for 2006. HMRC will not release its estimates for last year's losses until later this year.
Last month the ONS reported that VAT receipts in 2005/06 fell for the first time since the tax was introduced in 1973. Gordon Brown had forecast a rise of £3.5bn a year ago.
Ireland and MTIC Fraud
From the late 1990s, UK revenue losses from what is termed Missing Trader VAT fraud was growing by up to three quarters of a billion pounds each year. By 2001/2002, it was costing the UK taxpayer up to £2.75 billion and it has made some Irish people very rich. In the first half of 2002, the category "Electrical Machinery (apparatus, appliances and parts)" in Irish trade statistics was inflated by more than €8 billion in respect of both import and export trade with the UK.
UK Revenue & Excise detected carousel consignments of computer chips shipped to Ireland in the first half of 2002 large enough in aggregate to have supplied the entire market for that chip in Europe, Asia and Africa put together.
VAT Missing Trader Fraud, of which the most common variant is 'carousel' fraud, involves a fraudster obtaining a VAT registration number in the UK to purchase goods VAT free from a business in another EU Member State under the Single Market rules which govern intra-community transactions between EU businesses. The fraudsters create bogus companies, import goods VAT-free, collect VAT on onward sales to customers (17.5% of the invoiceable value of the goods in the UK) and then disappear without accounting for the tax due to the Revenue & Excise, leaving the UK taxpayer hundreds of millions of pounds out of pocket.
The fraud relies on bogus trade in high-value, low-volume consignments like computer chips and mobile phones. In ‘carousel’ fraud, the same consignment of goods is sold through a series of contrived transactions back and forth between EU Member States, to steal the sums charged as VAT every time the goods go around the circle. There have been a number of convictions involving Irish nationals but they are thought to represent a small minority of the number of Irish involved.
Sometimes the goods get re-exported and re-imported again, with the VAT being reclaimed each time. This is known as "carousel" fraud.
Spreading beyond EU
The HMRC says that following a change in the pattern of trading associated with Missing Trader Intra-Community (MTIC) fraud, identified by HMRC, interpretation of the breakdown between EU and non-EU trade is more difficult. ONS and HMRC statisticians are investigating the impact on the trade statistics.
Originally, most carousel chains only involved EU member states. More recently, there has been an increase in carousel chains that include non-EU countries, for example, Dubai and Switzerland. HMRC set up a project to review the methodology for producing the estimates of the impact on the trade statistics. Estimates may change as the analysis of the fraud continues. Fraud, by its very nature, is difficult to measure reliably, the HMRC says.
European Court of Justice Ruling
The ECJ gave a definitive ruling on the UK's Revenue & Customs' efforts to combat VAT fraud.
The UK Revenue & Customs applied to the European Commission for a special derogation called "reverse charge" which would allow it to stop VAT moving along chains of traders, being chargeable only when the goods go to an end-user.
On Thursday May 12th, the UK won a qualified victory over the legitimacy of the Government’s attempts to cut down on the multibillion-pound “missing trader” fraud.
The European Court of Justice ruled that Revenue & Customs can hold traders who are caught up in the fraud liable for VAT losses anywhere in the chain of transactions, as long as the traders had reasonable grounds for knowing about the fraud.
A spokesman for the Revenue said: “Traders that do not take reasonable precautions are at risk of being liable for unpaid VAT.”
Anthony Elliot-Square, the chairman of the Federation of Technological Industries, a trade body for mobile phone and computer part traders which brought the case, said that the judgment was fair.
He said: “There was a presumption of guilt before being proven innocent. There is a sensible approach, saying they do have the powers but they have to use the powers reasonably.”
