Carousel Fraud Running Rampant In The UK

by Jason Gorringe, Tax-News.com, London

15 August 2006

Official trade figures have revealed a massive increase in value-added tax fraud in the UK in the three months to the end of June 2006.

According to the UK's Office for National Statistics, almost GBP10 billion (EUR14.8 billion) of the country's exports were associated with Missing Trader Intra-Community fraud (MTIC), or carousel fraud, in the second quarter of the year, up 50% compared to the first quarter.

Carousel fraud has now reached such proportions that it is distorting the UK's trade data. Raw trade data suggested the the UK's exports rose by 39% year-on-year in the second quarter, but when the ONS factored out possible MTIC fraud, this falls to a 12% increase.

In its quarterly inflation report last week, the Bank of England also complained that carousel fraud makes it "extremely difficult" to accurately assess trade flows.

The fraud is largely perpetrated using goods such as mobile phones and computer chips, but also includes other electronic goods. It involves goods imported VAT-free from other EU Member States being sold through contrived business-to-business transaction chains in the UK, and subsequently exported. The tax loss occurs when the VAT charged on the initial sale of the goods in the UK is not paid to HM Revenue & Customs because the seller disappears. The purchaser can still reclaim the VAT, so the loss crystallises when the trader who exports the goods from the UK makes a repayment claim.

However, MTIC is a European concern, and some estimates have put the total loss of VAT within the EU at EUR50 billion annually. This has prompted some European governments, including the UK, Germany and Austria, to seek permission from Brussels to change VAT regulations to apply 'reverse charging' under which the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. So far only the UK has been given permission to change its rules to combat the fraud.

Momentum for action to combat the problem is also growing within the European Commission. In a paper published earlier this year, Taxation Commissioner Laszlo Kovacs presented some radical proposals to counter carousel fraud, but it is thought the EC will take a more conservative approach to the problem by enhancing administrative cooperation and improving safeguards in the current system.

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