FraudTrack Figures Reveal Shocking Cost of VAT Fraud to UK - Simon Bevan
Monday 7 January 2013, headlines in the FT, Times, BBC, Sky and City AM and across the country regional papers raising the alarm on the rise of tax fraud over the past six months in the UK. BDO’s Head of Fraud, Simon Bevan, has been analysing reported fraud (over £50k) in the UK for almost a decade, identifying trends, vulnerable sectors and typical frauds that are being perpetrated.
It is hard to calculate the cost of fraud to the UK economy as a vast majority of public and private sector fraud is not reported. However, today’s figures report that tax fraud accounts for nearly half (44%) of all fraud reported in the UK – the highest level since 2007. Whilst total fraud in 2012 fell by a third, tax fraud in 2012 totalling £603m, demonstrated only a relatively small decrease from the previous year.
Tax fraud goes hand in hand with VAT fraud, with the current UK VAT gap being close to £10bn, with fraud accounting for approximately one third of this figure. We believe that the vast proportion of this amount is due to carousel or missing trader fraud. Our figures show that VAT fraud alone accounts for 41 percent of the total UK fraud figure. This is also an EU wide problem and with the 27 member states having a combined VAT gap of €100bn - the EU is potentially losing around €33bn due to VAT fraud in this wider market.
To put this in real terms, if a third of the UK VAT gap is due to fraud, that equates to £3.3bn missing from the public purse every year - equivalent to at least 1 pence off the effective rate of tax for every UK taxpayer - or this amount would pay for the winter fuel allowance, free TV licences and compensating pensioners on the pensions credit and still leave enough over to build 17 new hospitals!
The overall drop in reported fraud between 2011 and 2012 has to be treated with some scepticism. We know through our own investigations that in the vast majority of cases the police do not have the resources necessary to investigate a number of large complex frauds in parallel. The consequence of this is that reported fraud figures reflect the ability and the capacity of both the police and the criminal justice system to process them rather than the actual number of frauds committed each year.
In terms of vulnerable sectors, the top three industries most susceptible to fraudulent activity are:
- public administration (£615m)
- finance and insurance (£473m)
- the arts, entertainment & recreation (£142m)
Despite accounting for almost half a billion pounds of fraud during 2012, the finance and insurance sector appears to have made substantial strides towards combating fraud; this is the lowest level of reported fraud in the sector since 2007 and down from £834m in 2011.
Our figures show that the types of frauds being perpetrated are as follows:
- Tax fraud - £603m (44% of all fraud)
- Unauthorised use/misuse of assets - £209m (15% of all fraud)
- Counterfeiting - £207m (15% of all fraud)
- Mortgage fraud - £64m (5% of all fraud)
- Third party fraud - £62m (5% of all fraud)
- Money laundering - £60m (4% of all fraud)
- Employee fraud – £56m (4% of all fraud)
- Other (including Management, Breach of Regulations, non-corporate and corruption) - £111m (8% of all fraud)
So what can management do to safeguard their organisations?
- Start at the recruitment stage and vet all new recruits appropriately
- Train all staff in codes of practice and policies
- Review your spending regularly
- Look out for red flags
- IT security: Keep your user permissions and access rights under review
- Know your risks areas – i.e. where is the most expenditure?
- Install trip wires – test your own defences and controls
- Monitor your suppliers
- Watch your relationships with your largest customers – remember the UK Bribery Act