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House Of Commons Publishes VAT Fraud Report

by Jason Gorringe,, London

03 August 2007

While HM Revenue and Customs has had some major successes in breaking VAT fraud gangs in recent months, a new House of Commons report has criticised the department for reacting too slowly to stem the flow of tax losses brought about by missing trader, or carousel, fraud.

According to the Commons Select Committee on Public Accounts report, VAT missing trader fraud has cost the Exchequer at least GBP1 billion each year since 1999-2000, peaking at estimated losses of between GBP2-3 billion in 2005-06. The EU Commissioner for Taxation has estimated the annual loss from VAT fraud across the European Union at GBP40 billion (EUR60 billion).

"It is a serious attack on the tax system by organised criminals, who are able to exploit the way in which European Union legislation provides for Member States to operate the VAT system. The Department has been dealing with missing trader fraud for over six years but has failed to stem the flow of tax losses," the report stated, adding that progress on implementing the Committee's previous recommendations for tackling VAT fraud has been "limited."

The UK is one of the few EU countries which publishes statistics on missing trader fraud, but HMRC was castigated by the Commons report for not having mechanisms in place to effectively share information with other EU tax authorities, and to measure the quality of information concerning VAT fraud coming in from the EU.

"The Department should assist this process, for example by supporting the Commission's initiative to establish reliable estimates for the European Union as a whole, and sharing methodologies with other Member States for calculating estimates at national level," the report recommended.

The report noted that the response rate to requests for assistance from other EU Member States to tackle missing trader fraud was only 53% in 2004-05 and 55% in 2005-06. "The Department should set a demanding target for bringing the response rate closer to 100%," the MPs said. They also noted that by February 2006, the Department had received 2,066 spontaneous exchanges of information but gave no feedback about the usefulness of the information.

The Committee also urged the UK government to look into more effective ways of shutting down the VAT system to fraudsters, and warned that criminals could simply sidestep the new 'reverse charge' mechanism on mobile phones and computer chips by switching to other high-value items.

"There is a risk of criminals switching the fraud to other electronic equipment, which the Department originally sought to manage by seeking to operate the "reverse charge" across a range of electronic goods. The Department should be alert for any switch of the fraud to other goods and apply promptly for EU authorisation to wider the mechanism as necessary," said the report.

The department was also criticised for being unable to show that it had actively stepped up the reporting of accountants, tax advisers and lawyers to their professional bodies for instances of misconduct in response to the Committee's previous report.

"We recommended that the Department should make greater use of sanctions available to professional bodies to investigate unethical conduct by their members," the report stated: "The Department is still considering whether its powers provide a sufficient framework to support referral of misconduct to professional bodies, but this work should not prevent the development of clear procedural steps to make professional bodies aware of unethical behaviour by their members on a timely basis."

HMRC was praised, however, for tighter registration controls which have been effective in stopping fraudsters from obtaining a VAT number; a review of registrations resulted in 2,200 applications being refused out of 3,600 investigated in 2005-06. But the report urged the department to confirm that it has the management information to keep sight of the balance between preventing fraudulent VAT registrations, and impeding legitimate trade.

Lastly, the report noted that the financial rewards from missing trader fraud have been high while the risk of fraudsters being caught and penalised has been low. Since 2001-02, the Department has secured 157 convictions for total imprisonment amounting to some 603 years, or nearly four years per conviction.

"The Department, in liaison with the Revenue and Customs Prosecution Office, should work with the Ministry of Justice, the Sentencing Guidance Council and the Sentencing Advisory Panel to establish whether the Courts should have specific advice and sentencing guidelines to apply in missing trader fraud cases," the report concluded.

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