Tuesday, July 11, 2006
Riding Along On A Carousel
We've blogged before about the huge sums HM Revenue & Customs lose to fraud. One of the leakiest and most problematic areas is VAT.
VAT was invented by a Frenchman- wouldn't you know it- and imposed on Britain as a condition of joining the EU. Before that we had Purchase tax, which was a strightforward tax on the sale to the final consumer. On paper, VAT sounds very elegant: a sales tax ultimately paid by the consumer, but difficult to avoid because it is levied on all sales whether to consumers or businesses. Businesses just have to reclaim their own tax payments. Simple.
Er well...simple as long as nobody breaks the rules, that is. Unfortunately, from cash in the hand builders to international criminal gangs, more and more people are doing precisely that. In 2004-05, despite a much trumpeted compliance programme, the loss from fraud and errors was still put at £10bn, 13.5% of total VAT receipts.
The most spectacular and troublesome area is so-called Missing Trader (MTIC) and Carousel fraud.
These may sound quite complex and technical, but they're not. Missing trader fraud is where somebody imports stuff free of VAT, sells it in the UK with the VAT added, and then scarpers, pocketing the VAT. Usually the stuff comprises small high value items such as mobile phones or computer chips, and the buyers may be entirely legitimate firms who have absolutely no knowledge of the fraud.
Carousel fraud is a more sophisticated variant, where business A imports the phones VAT-free, sells them on with VAT added through a string of "buffers" to business B, who then exports them on to business C and reclaims the VAT from HMRC (exports being free of VAT). So HMRC have then lost out tweice. Business C might then export them back to business A, who then sells them to Business B, and so on.
Originally these frauds mainly involved intra-EU trade, driven by the fact that such trade is free of VAT. But now it involves trade with notorious scam zones such as Dubai and Russia. Indeed, so massive is this fraud it's skewing Britain's international trade figures, pushing up exports to Dubai by as much as £500m in one month alone: the Office for National Statistics is frantically trying to wrap its head round the problem.
Last year, HMRC claimed they were getting on top of things, with MTIC losses down to £1.12-1.9bn in 2004-05, and one or two high profile prosecutions. But today we learn that losses are back up to £5bn, and the EU is about to grant HMRC emergency powers to abandon all that charge and reclaim business on mobile phones and computer chips. In future, for those items they will levy all the tax just once at the point of final sale.
It used to be called Purchase Tax.
Posted by Mike D at 2:56 pm