Missing trader fraud

Missing trader fraud (also called Missing Trader Intra-Community, MTIC, or carousel fraud) is the theft of Value Added Tax (VAT) from a government by organised crime gangs who exploit the way VAT is treated within multi-jurisdictional trading where the movement of goods between jurisdictions is VAT-free. This allows the fraudster (person who commits fraud) to charge VAT on the sale of goods, and then instead of paying this over to the government's collection authority, simply absconds, taking the VAT with him. The term "missing trader" refers to the fact that the trader goes missing with the VAT. "Carousel" refers to a more complex type of fraud in which VAT and goods are passed around between companies and jurisdictions, similar to how a carousel goes round and round. In the UK the fraud is investigated by HM Revenue & Customs and prosecuted by the Crown Prosecution Service and the Crown Office and Procurator Fiscal Service.

European Union

In European Union (EU) the European Union Value Added Tax ("EU VAT") allows merchants to charge VAT on the sale of goods when they sell goods to another member state.

Figures from Eurocanet, a European Commission sponsored project, released in September 2006, appear to show that the United Kingdom is the main victim of this fraud, having lost an estimated €12.6 billion during 2005-6, followed by Spain and Italy which each lost over €2 billion during this period.^[1] From 1 June 2007, the UK is introducing changes to the way that VAT is charged on mobile phones and computer chips to help combat fraud.^[2][3] UK plans to introduce changes to the way VAT is charged on a wide range of goods from December 2006 were aborted because of failure to reach an agreement with other EU member states.

Operation of the VAT system

In brief, however, a business that buys and sells goods charges VAT to those to whom it sells ('output tax'), and is charged VAT by those from whom it purchases ('input tax'). It can reclaim (subject to various rules) the VAT it pays, and so passes to the Government the net VAT it collects (being output tax less input tax). In this way, a business acts as a tax collector on behalf of the Government.

Within the EU VAT, member states charge VAT at differing rates on goods as a form of indirect taxation. All exports of goods however are tax free. This leads to the situation where an exporter will be able to reclaim VAT from the Government, as it will have been charged VAT by the business from which it purchased the goods, however will owe the Government nothing because it has sold the goods tax free.

Operation of the fraud

The fraud exploits this reclamation of tax. It lends itself to small, high value items, such as microchips and mobile telephones.

Missing trader fraud

The simplest missing trader fraud is where a fraudster imports some goods, and then sells them. When he sells them, he charges the price of the goods, plus VAT. He then absconds with the VAT instead of paying it to the Government. This situation, where the goods are made available for consumers in the importer's home market is often known as 'acquisition fraud'.

Within the EU VAT system, the fraudster imports the goods from an exporter in another member state. This allows the exporter to zero-rate, which means that the exporter does not have to pay VAT. Meanwhile the fraudster reverse charges the VAT and when the fraudster sells the goods to the vendor the vendor pays the price of the goods and the VAT that the fraudster reverse charged. Typically the fraudster/importer must pay over the reverse charged VAT to his or her government, but not immediately depending on the day of the month the transaction occurred. Therefore, the fraudster must sell the goods before the fraudster must turn in the reverse charged VAT.

Carousel fraud

A more complex example is for several businesses to act in concert. In this situation, the goods are sold to a series of companies, before being exported again. The goods therefore go round in a 'carousel'. This is best explained by way of an example:

Consider a trader based in the UK. He buys from France a consignment of mobile telephones for £1,000,000. He pays the French telephone manufacturer for the goods. The goods are then shipped to a dock in the UK. No VAT is charged on that shipment.

The trader now sells those telephones to a conspirator, for £1,100,000. He charges 17.5% VAT (at 4th January 2011 the current standard VAT rate in the UK is 20%) and the conspirator sends £1,292,500 (being the price of the goods plus the tax) to the trader.

This conspirator then sells the goods to a third conspirator for £1,200,000, charging VAT on that sale. The third conspirator pays £1,410,000 to the second. This may continue for many conspirators; however, three will suffice for an example. The third trader now sells the telephones to a German company, which may well be innocent. No VAT is charged, and the sales price of £1,500,000 paid by the German company without VAT. So far the conspirators have made a profit of £500,000 perfectly legitimately on buying and selling mobile telephones. In an honest operation, the first trader would pay £192,500 to HM Revenue and Customs (the UK's VAT collection agency). The second trade has collected £210,000 in VAT but paid £192,500 in VAT and therefore has to pay only the difference (£17,500) to HM Revenue and Customs. The third trader has charged no tax on its sale but has paid £210,000 in VAT and can therefore reclaim £210,000 from HM Revenue and Customs. In the fraud, the first business vanishes without paying the VAT to HM Revenue and Customs. When the last business in the chain collects £210,000 on the export, all of the businesses can vanish, £192,500 better off at the expense of HM Revenue and Customs. As this business is removed from the vanishing party, it is difficult for HM Revenue and Customs to show the links in the chain and thereby refuse to refund the VAT on the export.

In terminology, each business described above is called a "buffer". In a real case there can be many buffers, all helping to blur the link between the final reclaim and the original importer, which will vanish.

This entire series of transactions can occur without the goods ever leaving the dock in the UK before being re-exported. Furthermore the same telephones can be used again and again going through the various buffers, each pass around the 'carousel' bringing reclaimed VAT to the fraudsters.

Contra-trading

Contra-trading fraud is the further evolution of carousel fraud, and evades government detection by using two carousels of traded goods where one carousel is legitimate and the other is not thereby allowing an accounting scheme where the input and output VATs neutralize each other thereby concealing the fraud.^[4] Jaswant Ray Kanda, of Sutton Coldfield, West Midlands and his gang were key players in this type of carousel fraud^[5]. Customs Officials who were investigating them called their operation Maypole as they had clear evidence that Kanda and his gang sent the same lot of goods round and round again.

"Innocent parties" - the 'Bond House' decision

Although the example above referred to all the links being co-conspirators in the fraud, according to a decision in the European Court of Justice it is possible that innocent parties also become involved by simply buying and selling on goods. If it is the first party in the chain who is the absconding fraudster, the goods can continue to be sold-on by innocent parties (though the practicalities of this assessment can lead to difficulties in explaining why an organiser would want to risk the fraud being stopped in its tracks by an innocent trader selling to another person not involved in the fraud; and so unable to complete the circle which enables a huge VAT repayment claim by the exporting broker).

In the UK, the position until 2006 was that HM Customs and Excise withheld VAT repayments to others later on in the chain, on the basis that the transactions were lacking in economic substance and so should be outside the scope of the VAT regime.

Bond House Systems Limited was one such "innocent trader", who was owed £13,200,000 in VAT repayments by HM Customs and Excise. It challenged the UK Government's stance, taking the case eventually to the European Court of Justice. In January 2006 the ECJ found in favor of Bond House and ordered that the VAT owed to Bond House be repaid by HM Revenue & Customs. It is estimated the decision will cost the UK government hundreds of millions of pounds as other companies make their claims.

Cost of the fraud

According to the case Federation of Technological Industries v Customs and Excise Commissioners ([2004] EWCA Civ 1020) in 2002-3 the estimated cumulative cost of such frauds to the UK alone was between £1.65 and £2.64 billion (US$2.9 to $4.62).

According to the BBC, "So-called 'missing trader' or 'carousel' fraud is estimated to cost European taxpayers up to £170bn a year - twice the European Union's annual budget."^[6]

The fraud has mutated and now can incorporate all high value goods such as designer goods, health products, jewellery etc.

References

1. ^ Oliver, James (2006-09-22). "VAT scams hit UK taxpayers hard". BBC News. http://news.bbc.co.uk/1/hi/business/5369776.stm. 
2. ^ "Clampdown on VAT fraud". BBC News. 2006-09-18. http://news.bbc.co.uk/1/hi/business/5355426.stm. 
3. ^ "New anti-fraud VAT rules come in". BBC News. 2007-03-19. http://news.bbc.co.uk/1/hi/business/6467453.stm. 
4. ^ Olympia Technologies Ltd. VAT Tribunal #20570 (2-15-08)
5. ^ "£54 million VAT fraud gang is jailed". Birmingham Mail. 2007-01-08. http://www.birminghammail.net/news/worcestershire-news/tm_headline=-54-million-vat-fraud-gang-is-jailed&method=full&objectid=18421584&siteid=50002-name_page.html. Retrieved 2008-11-21. 
6. ^ Phil Kemp (2008-10-04). "Fraudster's 'pop star' lifestyle". BBC News. http://news.bbc.co.uk/1/hi/uk/7650883.stm. 

• Federation of Technological Industries v Customs and Excise Commissioners ([2004] EWCA Civ 1020)
• European Court of Justice decision EUECJ/2006/C35403 [1]
• HM Revenue & Customs PN03 2006 Budget Release
• Successful Prosecutions in £138m "Carousel" Frauds – 21 Convicted, Sentences of 202 Years [2]
• The Fraudsters - How Con Artists Steal Your Money Chapter 7 - The Cash Carousel (ISBN 978-1-903582-82-4) by Eamon Dillon, published September 2008 by Merlin Publishing

External links

• Experts stumped by leap in trade gap, Guardian, September 10, 2005, discusses "missing trader fraud" and "carousel fraud".
• EU clampdown spawns new carousel fraud, Guardian, May 29, 2007, discusses "contra trading" in the EU and "flipping" in Canada.