VAT Fraud is not what you think it is
It is much, much worse.
This article reviews a very well written and clear article published by the European Public Prosecutors Office. I would recommend that you stop reading this right now and look at the report on this link, it’s a two-minute read and explains what the (alleged) baddies did.
OK. Read that? I have no inside knowledge or interest in this particular case, this article is not about what the defendants did or didn’t do. I picked this report, because it clearly articulates VAT Fraud in the way that it is normally described. It avoids technical detail, which is just as well because VAT fraud (also known as Carousel Fraud or Missing Trader/MTIC Fraud) is famously complicated. Those who know about it are all too keen on explaining it in great detail, thereby missing the wood for the trees. The result is that something that should make you, as a tax payer, extremely angry, makes you bored instead. Perhaps this is a deliberate ploy, by the tax authorities, who are letting us down so badly. I’ll let you decide, once you’ve got to the end of this article. Please comment, particularly if you think I am being unclear. Let’s focus on the third paragraph of the EPPO article:
“The defendants are believed to be the ringleaders of a criminal organisation, active in the international trade of consumer electronics (mainly AirPods). They are suspected of evading tax by means of a VAT carousel fraud – a complex criminal scheme that takes advantage of EU rules on cross-border transactions between its Member States, as these are exempt from value-added tax1 – with estimated losses to the EU and national budgets of at least €93 million.”
I have highlighted the parts which I think are wholly misleading. The extract now reads:
“The defendants are active in the international trade of consumer electronics (mainly AirPods). They are suspected of evading tax of at least €93 million.”
I hope that you agree that this is a clear sentence, that does not alter the meaning of the original author. The problem is that the sentence is not true. The sentence does not say what has happened in this case or any other VAT/Carouse/Missing Trader Fraud. The defendants were not active in international trade, they pretended to be active. As the EPPO say they “established a fraudulent chain of traders”. They were not trading, they were not active, they just pretended to the tax authorities that they were. Part of the pretence would involve some real AirPods, the investigators seized 1,800 of them, which was probably the entire stock, which the defendants had moved around multiple times in a pretence of importing and exporting, buying and selling. They needed to generate at least some real-looking paperwork from which to breed bogus paperwork. This is important because of what happens next.
“They are suspected of evading tax of at least €93 million”. Except they are not evading tax, they can’t be because they are not really trading. It is a pretence. There is no trade, there are no real Airpods (or virtually none, compared to what the fraudulent documents claim). The evasion of tax is also not happening, despite the EPPO claim.
What is happening is that the defendants have successfully claimed refunds of tax that was never paid in the first place. The trade is fraudulent, the VAT was never paid, the refund claim is false too, but the refund itself is all too real. €93 million in this case. The reason for this bizarre situation is because the VAT refund process is designed to be swift so that real traders do not experience cash flow problems. The tax authorities pay first and ask questions later. In this case they have discovered missing traders - and their own mistake.
In fact what has happened is that VAT paid by legitimate traders and customers, like you and me, was handed over to the defendants, who have successfully duped the authorities. Those same authorities, using the EPPO, are now trying to recover €93 million that they should never have handed over to organised crime in the first place.
I talk about this in Chapter 17 of The War on Dirty Money. In that chapter it is explained that the average annual pay-out by the authorities to organised crime in the European Union is an incredible €60 billion. It should be front page news all day, every day. Next time you read about VAT/Carousel/Missing Trader/MTIC fraud, I hope you can read between the lines.
You may wonder how exemptions from VAT could generate VAT refunds. The fraudulent chain of traders will include companies in “non-EU countries“ (as the EPPO article confirms)
Thanks Simon. I too have sat through hours of presentations. I think that this crime is preventable and the sheer scale of it should warrant a review of how refunds are paid.
Very helpful and succinct explanation of a notoriously complicated subject. I once went on FCO MoU junker to Abu Dabhi and sat through 2 x 2 hour presentations by 2 x HMRC Officers over two days. Totally different, equally incomprehensible!