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What is VAT Fraud? What do I need to do to mitigate risk?

Internal Control (SOX, SSAE16) Tax & Risk Management Value Added Tax (VAT)
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Richard Cornelisse
If a business charges you VAT it must be VAT registered and must declare any VAT it charges to HMRC. Some businesses deliberately avoid registering for VAT, thereby gaining an unfair advantage over their competitors. Others may either be bogus or may lie about the amount of VAT that they owe. You might know that a business is not declaring all the VAT they’re charging, or you might think that they’re not because they:
- ask you to pay them in cash and are reluctant to provide an invoice
- request that payment is made to someone other than the business
- offer a discount for cash and are reluctant to accept cheques or credit cards
- offer goods for sale at substantially below market value
- put money into an open till drawer without ringing up a sale
- Missing Trader Intra-Community VAT fraud

‘Missing trader’ fraud involves obtaining a VAT registration number in the UK for the purpose of purchasing goods free of VAT in another EU Member State. These goods are then sold in the UK at a VAT-inclusive price. After which, the trader will go missing or default, without paying the VAT due to HMRC. Another form of this type of fraud is called ‘carousel fraud’. This involves trading the same goods around contrived supply chains within and beyond the EU. The goods will re-enter the UK on a number of occasions with the aim of creating large unpaid VAT liabilities and fraudulent VAT repayment claims.

While this VAT gap covers more than just fraud (also legal avoidance and insolvencies), a study set the gap at €106.7 billion in 2006 within the EU-25. In some serious cases, vast sums are lost within a very short timeframe, due to the speed at which fraud schemes evolve nowadays. For example, between June 2008 and December 2009, an estimated €5 billion was lost as a result of VAT fraud in greenhouse gas emission allowances. Combating fraud is high priority as VAT fraud costs the EU and national budgets several billion euro every year.

In order to combat fraud the customer is in principle jointly liable. Such liability exist however only when the customer “knowns or should have known” of the fraudulent transaction.

How to mitigate risk?

To avoid joint liability the honest trader has to prove proper internal awareness: such as proper counterpart acceptance measures, the company’s control framework should include detective and preventive controls. Examples of detective controls: undertake robust risk assessments, use data analytics to identify potential fraudulent activity, providing staff with fraud awareness training and putting in place an effective plan for responding to fraud.
Leave a Comment 451 weeks ago

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Dr. Clifford Frank
I agree in the most with Richard, However, Knowns or should have known" is an objective test and therefore Richard is correct in his analysis. However, the prosecuting authority will seek to challenge, the extent of the customer fraud prevention procedure, to the extent that they will drill down into the movement of funds. This is done with the assistance of the banks.

In the UK HMRC has indicated that they will consider lifting the corporate vial, if the are of the opinion that the customer should have known!
Reply 408 weeks ago

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