VAT fraudsters 'laughing all the way to their offshore tax haven'

Carousel fraud accounted for 87 per cent of the total fraud cases reported in the UK for the first half of 2007. According to research figures published by accounting firm BDO Stoy Hayward, there were 141 business frauds (reflecting a 42 per cent jump) over £50,000 in value at a cost of £538m, of which £468m was from major VAT …

[Anonymous Coward]

Erm, is this real?

I've been taking these reports at face value, but I'm just not convinced here. Perhaps I don't understand how the fraud works?

As I understand it, the fraudster registers for a vat number and imports products from Europe vat free and is able to obtain somehow the discount price that established businesses can get. Lets say it's mp3 players, and somehow the supplier has enough stock in the channel to supply them immediately.

As a new business, he'd be required to pay 100% upfront because no supplier will extend credit to a new business.

They then sell on the things with VAT in the UK, so they apparently have the contacts required to immediately sell the mp3 players. Since the buyer could import the product themselves at the European wholesale price (and presumably they already have their orders in, they just don't sit around and wait for people to walk in off the street and sell it to them), the seller would have to offer a discount to close the deal and that would have to come out of this VAT profit margin.

Not only that they can collect the payments immediately, without extending the usual 30 days credit. Which is odd because they are a new business and must be selling to old existing businesses. That would be a buyers market, if the person can't unload more 83% of the stock then they've lost money, and that ignores the discounts and the import and shipping costs.

And somehow these players or phones physically move from Europe to end customer, also within this time window before the VAT is due.

Suppose that £458m was half phones and half chips, and the mobile phones costing 50 quid to buy wholesale, that means 4.5 million units. That's a hell of a lot of products, presumably they'd have to pay holding and storage costs on that.

So something doesn't seem quite right about these stories, also the frequency of them, and the sources, and I also read foreign newspapers and this seems to be a UK only problem, which is another warning sign that these aren't real.

So what am I missing?

[Anonymous Coward]

No need for profit margin

The importer doesn't need any real profit margin on the imported item because all the profit is in the VAT they pocket. The importing company probably sells the goods cheaply to next step buyers which might be owned by the fraudsters too. Finally the products are blended in to normal channels, no need to discount.

Even a lone importer could probably earn very well operating on a personal contact basis. Businesses are wililng to pay even in cash if the price is good and the person is known as a quality supplier. One person with a van and a mobile phone could easily run a multi million pound memory chip or cpu import operation. Earn VAT minus expenses, big money.

Solution? Cut the taxes.

[Anonymous Coward]

Solution

The solution is not to cut the taxes, but to change the VAT system so that goods are taxed in the countries where they are supplied, not where they are consumed. However, this would mean tax harmonisation, and many see this as eroding our ability to run the country. Meanwhile, tax payers continue to fund these fraudsters to the tune of hundreds of millions of pounds a year.

[Anonymous Coward]

I still don't see how that could work.

"The importer doesn't need any real profit margin on the imported item because all the profit is in the VAT they pocket. The importing company probably sells the goods cheaply to next step buyers which might be owned by the fraudsters too. Finally the products are blended in to normal channels, no need to discount."

I still don't see it. Perhaps you could walk me through a scenario.

Suppose I imported a mobile phone at 30 quid/unit. I have to pay upfront because I'm a new business and Nokia don't extend credit to me.

To blend that product into the channel, I can't sell it more than the going price for that channel. Which can't be much more than 30, since any legit business could simply buy from Nokia at 30.

So I sell them at 30+vat and pocket the 5.25 vat. So far so good, 17.5% is a poor margin, but still, it's a profit.

But then we get to the real world. Nobody buys from Dellboy in the pub, they can't guarantee the quality of the product. Are these Nokias legit, or some crappy knockoff? Are 10% of the boxes duds? Are they a faulty batch? Are they second hand? Who knows. Dellboy doesn't guarantee the product, Nokia does.

You're a new business and new businesses have difficulty selling, 80% of them fail. Worse you are selling into an established market with big players who get better prices from Nokia than you do.

Plus the phone shops already have their orders in, they don't just wait around on the off chance a supplier will turn up and sell them the product. They don't want an oversupply of a product that changes rapidly either.

So I have to discount to get them into the market, but I only have 5.25 pound margin to discount, the lowest I could sell at would be 24.75 and at that I'd be breaking even. Even then I'd have to sell 100% of my stock.

It's not enough I think. I don't see how a chain of companies improves that, since the end product has to go into a market with a defined buy price. So I don't see how this can work.

On the other hand I can imagine how easily new companies import products, fail to sell, dump the product at a hefty loss and move on before the VAT office makes them bankrupt. But that's incompetence not fraud, they'd be taking a hefty loss.

I don't see at all how it could work with MP3 players and the likes, which aren't made in Europe at all and so can't be bought at competitive prices in Europe.

[Morely Dotes]

It's incompetence on the part of the Inland Revenue

And apparently a Byzantine tax code.

Tax the items at the point of retail sale, at a fixed percentage of the retail price. Period. How hard is that? Shopkeepers can't simply up stakes and move to the Maldives; they either pay the VAT( aka "Sales Tax" in civilised nations), or go to jail.

Tell wholesalers to collect VAT every time they sell on to another wholesaler is what *created* the concept of carousel fraud; it's incredibly stupid. Only a career bureaucrat could consider it to be a good plan.

[Trevor Watt]

The Carousel

Usually much more complicated, but here is the abridged version:

Trader 1 who is based in the EU but outside the UK exports goods to trader 2 who is based inside the UK. These goods are VAT zero rated in Trader 1's country as they are exported.

Trader 2 is supposed to declare the purchase to HMRC and pay acquisition tax in the UK, and, providing that he is intending to use those goods in order to make an onward taxable supply, he can then claim credit for the same amount as input tax. But this is carousel fraud, so Trader 2 does neither. He sells the goods to Trader 3, a VAT-registered trader in the UK, charging and receiving VAT on the sale from Trader 3. Trader 2 then goes missing, trousering the VAT received from Trader 3.

Trader 3 then sells the goods on to someone outside the UK so charges 0% VAT. Trader 3 has therefore an input tax claim on the VAT system, but no output tax to offset it against from on the zero rated export sale, so claims the VAT paid to Trader 2 back from HMRC who stump up the money (and must do so unless they can prove Trader 3 was aware of the fraud.)

And the goods in question? Well the person Trader 3 sold them to then sells them on to Trader 1, who sells them to Trader 2, who sells them onto Trader 3, and the merry-go round continues to turn.

Often all these traders are all just different companies in different countries all owned by the same mob.

[kain preacher]

let me get this straight

so the importer is responsible for paying the tax , then he gets reimbursed by the retailer, and the retailer collects the tax.. Here in the states the last person in the chain is responsible for the tax(ie the retailer) or is the VAT not the same as sales tax ??

[David Dorey]

shiny metal ass

The goods don't exist, only the invoices do. HMRC are only there to rape honest businesses, they aren't set up to deal with crooks, we honest businesses don't pay them enough to do that properly yet. £538 my shiny metal ass. Grab hold of something solid folks we are in for a rough ride in the next few years while everything unravels. Gordon thought the Conservatives would be in charge by now.

[sleepy]

Title

"so the importer is responsible for paying the tax, then he gets reimbursed by the retailer, and the retailer collects the tax.. "

No; the importer collects the tax from the retailer, and is responsible for paying it over (less deduction of tax he has paid) on a quarterly basis. (although there is no retailer in the carousel fraud, which is a circular trade).

The opportunity for corruption among government tax collectors is extended by the VAT system to traders.

[Anonymous Coward]

Maybe time to rethink VAT

All you want is the VAT charged from the vat registered seller of goods to the non vat registered customer. I don't see why VAT has to be so complicated that it creates these loopholes. Or why UK businesses have to charge VAT to other VAT registered UK businesses for intra business trading.

Surely the simplest fix is to extend the zero rated system to intra-business UK trading?

That would be far easier than all these reverse charging and acquisition tax. I have yet to buy something from another EU country where the goods are zero rated despite my vat number, simply because everyone is so frightened of getting the VAT wrong, they charge by default.

[threaded]

The solution is simple

Decriminalize carousel fraud: if it's not a crime then there are no criminals!

Can't see how that can be considered dafter than having trader-to-trader VAT.

[Barry Mahon]

Robbing??

If there was a proper system of registering for VAT then the fraud would be harder. Anyone, anywhere, in the EU can set up a business (come to think of it doesn't even have to set up... just buy and sell goods) and is not automatically registered for taxes. So, carousel fraud exists, in the example, Trader 2 is the non-registered entity, wherever he is in the EU.

The conference 'industry' used a (sort of) legit version of this until the various authorities copped on. When the single market started you could run a conference outside your country, pay no VAT on the fee charged but claim your inputs against VAT in your own country.....

There is a legit version operated by Internet retailers, they register the EU sales in a low VAT country (Luxembourg is the present flavour of the month), but deliver in the EU. OTOH some sellers (such as Apple?) don't allow you to 'buy' outside your own country.... A real can of worms....

[Anonymous Coward]

Zero rate to the final sale

"The conference 'industry' used a (sort of) legit version of this until the various authorities copped on. When the single market started you could run a conference outside your country, pay no VAT on the fee charged but claim your inputs against VAT in your own country....."

The more I understand about this, the more I agree with the comments above. The zero vat rate should be applied all through the chain until the final sale.

The current system is too damn complicated, nobody but crooks and expensive accountants understand it. It's not the EU zero rate that's the problem here, it's that the zero rate isn't extended all the way through up to the final sale. Only the last in the chain should charge the VAT and complete the VAT return.

And why on earth do you have to register for VAT at all, if you ONLY do company to company business, which would then become zero rated? That would simplify a lot of business documentation if they didn't need to account for VAT. It would help small companies a hell of a lot.

[Dale]

VAT vs Sales Tax

VAT (value added tax) is supposed to reduce fraud (specifically, non-payment) although clearly it has problems of its own. To answer Kain Preacher, the problem with sales tax, which is only charged to the end purchaser, is that it is easily exploited. One way is for the retailer to simply say, "pay me in cash and we'll forget about the tax".

VAT is supposed to help discourage this by spreading the tax liability down the whole chain, from customer to retailer to wholesaler to manufacturer, the idea being that a customer might be willing to pay cash when he buys a single item but the retailer is less likely to be willing (or able) to pay cash to a wholesaler for an entire consignment of goods, and the wholesaler is even less likely to be able to pay cash to the manufacturer. Thus they are more or less forced to pay by trackable means (electronic, cheque, etc) which can be inspected by HM Revenue. The amount of tax ultimately received by HM is the same, but it is spread out across the chain. This is why it is called Value Added Tax. Each person in the buyer-seller chain pays the full tax rate over to HM when he sells the item on, but claims back from HM the full tax rate of the cost of the item; the difference between what he pays and what he claims back is effectively the 17.5% tax rate on his profit margin. In the end all the payments and reclaims partially offset each other and HM is left holding 17.5% of the final retail price, having received little portions of it from each of the people along the chain.

That's how it's supposed to work to stop tax avoidance at the point of sale. It doesn't eliminate it, just reduces the impact. And as we have seen, some people have figured out how to exploit the complexity of the payment/reclaim mechanism to basically claim back from HM money that wasn't due to them.

[Anonymous Coward]

Pay me in cash and we'll forget about the tax?

I don't see how it fixes that problem.

Suppose a retailer decides he'd like to pocket a little extra money, and offers occasional customers tax free cash-in-hand goods. For those goods, he's still able to claim the VAT he paid when he bought them. So the VAT office is still out it's full amount. Worse, it spreads the amounts out, so far more vat returns have to be monitored for far smaller scams.

So I don't see how spreading it down the chain actually fixes that problem you listed.

On the other hand, by concentrating VAT only on retailers, you've got far fewer sites to do random spot checks on. You've also eased the burden on a lot of businesses, and fixed all these inter community frauds.

[Barry Mahon]

Cash....

Of course, it is widely used.....

First question from many (especially service) suppliers.... are you registered for VAT? If not than it will be €x if I invoice you it will be €+vat....

Most of the suggestions above (if not all) for 'improvements' are open to all sorts of abuse.

The real value of VAT is that, from a tax collectors viewpoint, it is cheap to impose and collect, the payee does most of the work.

[Matt Jordan]

Crime College

I came to the registers comments section with a minor in petty theft and left with a masters in fraud ;)

[Anonymous Coward]

Original poster who don't see how it works

Compare these two: EU based continent importer/manufacturer sells item in quantity at 30 ex VAT.

Honest company imports item, adds their cut 20% plus VAT 17.5% ((30/0.8)*1.175), sales price to onward channel is thus 44.06.

Dishonest company imports item, don't need any profit margin because they steal the VAT, just add VAT 17.5% to the price, sales price to onward channel is 35.25.

If that's not good enough for you yet, imagine when the crooks start cutting on their VAT take due to volume.

Anybody buying from the crook in such a case would be hammering 20% extra profit, or could undercut their honest competitor's prices by 10% while turning a healthy 10% profit.

Before you start going on an "but if.." tangent please let me just say that I've worked in the industry (not in the UK, elsewhere in the EU) and saw the potential for the current fraud problems already over 10 years ago. It's not exactly hard to do the reasoning and the math. Why this seems to be so UK specific I don't know as the VAT treatment is identical across the whole EU.