VAT Fraud: Some basic facts

VAT is Value Added Tax, is a tax on consumer spending, and some businesses evade paying it through fraud. VAT fraud is one of the most common forms of tax frauds and something HMRC takes very seriously.

It usually can occur as the business is not charging VAT when they are required to, or charging an individual VAT, but keeping the amount and not paying it to HMRC. It can be small individual actions as well as large plans to commit Vat fraud. A common action is to avoid paying VAT by paying a handyman or a builder by cash.

VAT fraud is considered a deliberate tax evasion, and the businesses carrying it out will be penalised by HMRC. On a larger scale, it means deceiving governments (sometimes EU-wide) and on that there can be a serious crackdown.

Telecom and electronics industries are famously attractive for VAT fraud. Sometimes when a series of outlets are found within one industry to move the fraud from one to another, this organised form of VAT evasion is called a carousel fraud. It can be used both to make profit and launder money.

Another type of fraud is ‘Missing Trader’ fraud and the UK lost up to £1 billion in 2016 because of it. According to a source on Delta.net ‘’Missing trader fraud relates to the activity of exploiting VAT within multi-jurisdiction trading, where there is a movement of goods which are VAT free. Therefore, the organised gang of fraudsters can effectively decide the VAT on the goods and receive the money from this, instead of paying the VAT charge to the relevant government’’.

This is one of the most seriously punished VAT frauds that occurs.

According to EU sources, last year the EU economy lost €60 million because of VAT fraud, affecting Italy, Spain, Portugal, Germany and Belgium. The way it worked was that the organised crime groups (including around 100 companies across Europe), committing VAT fraud were simulating imports and purchasing electronic goods, then selling these online, whilst avoiding VAT.

The penalties for VAT fraud are decided in relation to the severity of the offense and are proportionate. They are:

– Fixed-rate penalty: 30% of the VAT which is due

– An early payment system: This is 25% of the VAT which is due, if an individual or organisation have shown awareness of the VAT fraud.