The EU system for levying VAT attracts more and more fraudsters, who abuse the system and leave EU Member States with massive tax losses. Inventive schemes are especially common in intra-community supplies of goods. The loss of VAT revenue by the European Union due to VAT fraud is estimated at approximately 100 billion Euros per year. Naturally the EU Member States actively try to monitor and combat VAT fraud, designing and prescribing more stringent rules for trading goods within the EU. Tax authorities have become more alert and initiate more investigations. But these stringent rules and investigations also affect companies that are operating in good faith and such companies can become involved in VAT fraud with severe adverse consequences, including harsh VAT audits that are costly, time consuming and may lead to liability for the ‘disappeared’ VAT. It is crucial that companies know how to recognize VAT fraud and, more importantly, how to prevent becoming involved.
VAT fraud is complicated and inventive in structure. In general there are two main types. The first is Missing Trader Intra-Community Fraud (MTIC-Fraud), of which carrousel fraud is an example. In such fraud there is a chain of transactions in which one or more companies effectively charges VAT to other chains but does not actually remit the VAT to the tax authorities. The other chain then asks for a reclaim of the VAT. The tax authorities grant such requests but never receive the VAT from the ‘bad’ supplier. The latter disappears after a while leaving the tax authorities empty handed.
The second category is black market trading, where suppliers operate that are not known to the tax authorities and do not fulfil their obligations to charge and remit VAT. This type of fraud usually takes place in luxury and expensive goods for private use such as clothing, computers and mobile phones.
Fraudsters in both situations often intentionally involve good faith companies in the transaction chain, giving it more substance and credibility and making it harder for the tax authorities to detect and prevent the fraud.
Companies operating in good faith may experience trouble such as liabilities and tax audits when involved in fraud. To detect and prevent such involvement, companies can take the following steps:
In some specific situations a company needs to pay special attention to ensure it does not get involved in VAT fraud. A company should be alert to:
This is a brief description of the necessity to prevent involvement in VAT fraud. The information of how to do it is not described in full as the best approach for each company depends on the nature of the individual company, the goods in which it trades and the market segment it operates in. This is nevertheless an indication of what a company needs to be aware of to avoid fraud and it is always better to be safe than sorry.
Patrick D. Vettenburg
VAT advisor at Loyens & Loeff N.V., Eindhoven