Carousel Fraud Blamed For Shock Fall In UK VAT Receipts

by Robert Lee, Tax-News.com, London

27 April 2006

A surprising fall in value added tax receipts received by the United Kingdom government in the past year has been blamed largely on the rising incidence of 'carousel' fraud.

According to official figures quoted by The Guardian newspaper, VAT revenues fell nearly 14% in March compared with March last year while revenues were down by 0.2% in the full fiscal year - the first time that VAT revenues have fallen on an annual basis since the introduction of the tax in 1973.

While a slowdown in consumer spending is thought to have played a part in falling revenues, the shock statistic has sparked fears that the extent of carousel fraud is greater than previously believed and certainly higher than the GBP1.1 billion to GBP1.9 billion annual revenue loss estimated by the government.

An HMRC official was quoted in the report as confirming that carousel fraud is viewed as a "significant problem" and a "major issue," by the government. HMRC already has a team of 500 within the department to combat the problem.

Carousel fraud, also known as missing trader intra-community fraud (MTIC), involves the importation of goods (typically high value small electronic goods such as mobile phones and computer components) free of value-added tax. The goods are then sold on by companies with the 17.5% VAT added, following which the firms disappear, having pocketed the difference. In many cases, the goods are passed along a long chain of traders making the fraud hard to detect and the perpetrators difficult to apprehend.

In January the United Kingdom made an application to the European Commission to be able to deal with VAT on certain goods in a new way, in a bid to cut down on the fraud. This would enable the UK to introduce a reverse charge procedure for transactions between VAT registered businesses in certain goods.

The application to the EC came after HM Revenue & Customs lost a key case in the European Court of Justice following its attempt to hold innocent companies in the chain of a carousel fraud liable for unpaid VAT.

According to the Office of National Statistics, carousel fraud has become so prevalent that it is distorting the UK's trade figures. In a report issued last year, the ONS warned that trade figures for April, May and June 2005 would have to be reassessed after it noticed a suspicious surge in exports of mobile phones and computer chips to non-EU countries.

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