HMRC VAT investigations up by nearly half

VAT REFUND INVESTIGATIONS carried out by HM Revenue & Customs have risen 44% over the last year.

Some 584 refund claims were selected for HMRC’s extended verification process (EVP) in 2012/13, up from 405 in 2011/12.

It is the first rise in the number of VAT refunds delayed by HMRC in the last five years, while there are concerns the rise in VAT to 20% in January 2011 incentivised criminals to exploit loopholes in European VAT laws in the UK.

HMRC estimates fraud currently costs around £1bn per year in missing VAT repayments, while the European Commission says that VAT fraud costs billions of euros across the EU per year. Between 2008 and 2009 an estimated €5bn (£4.3bn) was lost as a result of VAT fraud relating to emissions allowances.

Typically, the scams take the form of ‘carousel’ frauds, which take advantage of VAT rules concerning the import and export of goods in the EU. In such frauds, tax authorities make a VAT repayment to a business for the VAT on the purchase of a good or service but receive no VAT in return from other parts of the supply chain for the sale of that good.

These frauds rely on lengthy circular supply chains controlled by fraudsters. Small, high value items – anything from electronic goods to alcohol, and even wholesale gas and power – are typical targets as they are easier to trade cross-border in high volumes and values.

There is a danger, though, that legitimate businesses suffer in the latest crackdown, according to law firm Pinsent Masons, which obtained the figures.

Head of tax Jason Collins said: “VAT refunds can be quite sizeable, so delays in receiving them can hit a business’ bottom line. In the case of genuine businesses that aren’t committing fraud, these VAT refunds belong with them, not HMRC.

“HMRC might take action if there is VAT fraud being carried out somewhere in a company’s supply chain, or if HMRC suspects a company’s products are being used to carry out frauds. It’s very important that companies know their supply chains like the back of their hand and that they’re on the look-out for any suspicious activity.”

He adds: “The fraudsters will usually reduce the price of the goods to make them more easily saleable, using the VAT they never intend to give to HMRC as their margin. The reduced price creates a false market in the goods and the fraud can quickly go viral.”

An HMRC spokesman said: “Only a very small number of over two million claims we receive a year are subject to extended verification checks and the vast majority of businesses receive VAT repayments within days. These checks, alongside HMRC’s wider missing trader fraud strategy, have reduced the level of fraud by 75%.”