RSS feedsCarousel fraud is high on the government’s agenda. So, what is it?
Carousel is a particular type of VAT fraud, often characterised by a circular chain of transactions, where the goods being moved around to create fictitious transactions can end up back with the original perpetrator. Also known as missing trader intra-community fraud, it typically involves high-value, high-volume goods. Often, only the parties at the ends of the chain are the actual fraudsters, using innocent intermediate dealers and wholesalers to give an air of legitimacy.
In its simplest form, the fraudster brings goods into the UK from another EU country. This requires him to register for VAT. He then sells to a UK business and properly charges VAT. The customer is entitled to reclaim that VAT as input tax but, before the output tax becomes payable on his VAT return, the fraudster absconds with the cash. Because of the way in which VAT works, the innocent businesses should not suffer financially while the fraudsters get away with it.
Are fraudsters getting away with a lot of money?
Current estimates put the amount of VAT lost to governments at anything up to $100bn (£55bn) across the EU. It is true that much of what governments call avoidance is perfectly legal transaction planning but, even so, the amount lost to carousel fraud has been estimated at $40bn (£22bn). When you consider that VAT is charged at anything from 15% to 25% of the full transaction value, it is easy to see how the scale of tax losses can quickly mount up.
Why didn’t the government change the law to stop it?
It did. At first, it was a problem of identifying what was going on. HM Revenue & Customs would have legitimate claims for input VAT by businesses that had purchased the goods and sold them on at a profit. This would only really come to its attention if the goods were exported, when the large input tax claim would be noticed. If the goods were sold on as normal, the output tax would often exceed the input tax and not create so much attention.
The department that saw the problem was the one controlling debts, where VAT was owed by VAT-registered businesses. It took a while to realise it was not a series of one-off VAT frauds, but a concerted effort to defraud the taxman. It took even longer to identify the circular nature of the chain transactions.
The government changed the law to make all parties to a circular fraud jointly liable for the VAT due along the way. As a result, if one person absconded with the VAT, HMRC could look to collect it from any of the parties in the chain. In practice, it did this by denying input tax recovery to the innocent intermediaries.
What was the impact on intermediate businesses?
With the high values of the wholesale trade in such goods, many innocent businesses were forced into a difficult financial situation and employees lost their jobs. The VAT profession had made noises for some time that the new legislation was illegal, but it took an affected business to go to court to win the day. Even so, HMRC forced the businesses from the tribunal to the High Court, right up to the European Court of Justice, where the UK government was still trying to defend its illegal powers.
What action has the European court taken?
The European Court of Justice held that the UK’s new legislation was illegal and told the UK government to find another way. It is currently considering one such proposal.
The proposal would make the VAT payable on the transaction accountable by the customer through his VAT return, not by the supplier. This would remove, at a stroke, the cash in the hands of potential fraudsters and stop the fraud completely for the goods specified.
How does this affect small businesses?
For certain types of goods, you will need to account for the VAT normally charged by your supplier through your own VAT return. You can reclaim it as input VAT in the same return, just as you would have done previously, so there will be no net VAT cost to you. For sales of certain types of goods, you won’t charge VAT as your customer will account for this on your behalf. Until new legislation is drafted we won’t know the precise conditions, but it will undoubtedly involve additional obligations for you.
Simon Newark is a VAT partner at UHY Hacker Young
