The cost of VAT fraud

The level of fraud in the UK may have dropped by a third over the past year, but according to a new report by accountants BDO LLP, the amount of tax fraud hardly fell at all. It now accounts for almost half (44%) of all fraud reported in the UK.

What is VAT fraud?

VAT fraud comes in many guises. The Government explains it as the situation where a business doesn’t charge VAT when it should, or charges VAT but doesn’t then pay it to HMRC.

It is often seen with tradesmen, who deal on a cash-in-hand basis to avoid paying VAT on a sale or job, but other examples include firms that are not registered for VAT when they should be; firms who use a fake VAT number; or businesses that use a VAT number that is registered to another firm.

Serious VAT frauds

The most serious VAT frauds are organised by criminal gangs and include:

• Missing trader fraud – this occurs when an individual sells goods to a third party, charges sales tax and then either disappears or deliberately takes their company into administration before paying over their VAT liabilities.
• Carousel fraud – this occurs when an individual buys goods from another member state without paying sales tax. They then move the goods through a number of companies (the carousel) before eventually exporting the goods to the original seller. The fraudsters then claim a VAT refund (20%) from HMRC. In many cases the goods can be transferred round and round many times, leading to a number of VAT claims. Often the goods do not move at all, and the VAT claims are based on fraudulent paperwork.

Cost of VAT fraud

According to BDO’s FraudTrack report, which examines all reported fraud cases over £50,000, tax fraud cost the UK £603 million last year - almost double the cost in 2009, (£274m) and in 2010 (£309m).

The Treasury is losing out in a big way. The report reveals that the fraudulent element of the UK’s VAT gap (the theoretical difference between what the Government expects to receive in sales tax and what it actually receives) could be around £3.3 billion.

Around half of this is thought to be caused by general non-compliance due to mistake or deliberate act by legitimate traders, but half is thought to be caused by professional fraudsters.

Prosecuting tax evasion

According to Keir Starmer QC, Director of Public Prosecution in England and Wales, “the criminal justice response to tax evasion is being ramped up”.

In a recent speech he revealed that the DPP has taken a strategic decision to substantially increase the number of tax evasion cases prosecuted. The organisation has also beefed up its fraud prosecution capability, and is successfully prosecuting even the most sophisticated schemes.

“Tax evasion has to be dealt with robustly all the time,” he said. “But in a recession, when ordinary law-abiding tax payers are suffering real hardship, the need to deter, detect and prosecute those who evade tax is greater than ever.”

Contains public sector information licensed under the Open Government Licence v1.0.