- Tax fraud now double levels in both 2009 and 2010
- Government urged to commit greater resources to help HMRC fight carousel fraud*2 which costs UK approximately £3.3bn per year
- UK lags other EU member states in tackling carousel fraud*2
FraudTrack, which examines all reported fraud cases over £50,000, finds that, whilst total fraud in 2012 fell by a third from £2.1bn to £1.37bn, tax fraud in 2012 demonstrated only a relatively small decrease from the previous year. Totalling £603m, tax fraud is roughly double the amount in 2009 (£274m) and 2010 (£309m). Moreover, BDO believes that the vast majority of public and private sector fraud is not reported.
The report’s author, Simon Bevan, states that “Politicians and the public at large are presently pointing their finger at various multinationals for allegedly not paying the correct amount of corporation tax. However, our latest survey of UK fraud shows that, in reality, it is the fraud element of UK’s VAT gap - the theoretical difference between what the Government expects to collect in sales tax and what it actually collects - that is the bigger drain on the public purse”.
The current UK VAT gap is around £10bn with fraud accounting for approximately one third of this figure. Bevan states that “The vast proportion of this amount is due to carousel2 or missing trader1 fraud.”
This year’s FraudTrack 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 (Ben Terra, Professor of Law at Amsterdam and Lund Universities) 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.
Looking at it another way - this amount would pay for the winter fuel allowance, free TV licences and compensating pensioners on the pensions credit (£1.4bn) and still leave enough over to build 17 new hospitals (£1.9bn/£113m).
It is thought that approximately half of the £3.3bn figure (only £561m of which, according to BDO’s latest survey, was prosecuted this year) related to general non compliance due to mistake or deliberate act by legitimate traders whilst half is produced by a relatively smaller number of professional fraudsters committing Missing Trader Fraud1 and Carousel Fraud1.
Bevan states “These two types of serious VAT fraud are committed by professional criminals, rather than reckless ad hoc amateurs. That VAT fraud accounts for such a high proportion of overall fraud is a function of a significantly under-resourced HMRC.”
Bevan adds: “Anecdotally we are hearing that Missing Trader*1 and Carousel2 fraud is proving difficult and time consuming to prosecute and is now not a main focus of CPS policy; we think this is a false saving. To paraphrase JFK’s 1962 Moon speech: “We do these things not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills.” In recent years both the Germans and the Dutch have allocated resource to this issue and now suffer proportionally much less professional VAT fraud than other member States. If we focus on serious VAT fraud – and resource HMRC accordingly - we can immeasurably improve the public purse in a relatively cost effective manner”.
Preventing Carousel and Missing trader Fraud
- Increased checks on new registrations
- Database mining & knowledge sharing with other organisations
- Implementation of Reverse Charge (RC) mechanism on more goods
- Increased information sharing/ joint investigations between EU members
- Remodelling of services and focussed targeting of resources
- Deregistering, injunctions and prosecution where appropriate
How other member States Deal with the Issue
- Belgium and Netherlands have both set up Carousel Fraud units
- Belgian approach is to closely monitor known exporters of risky goods
- Dutch approach is to focus on those companies committing MTIC fraud
- German and Dutch authorities have enacted legislation to pass missing trader VAT liabilities to other traders in the chain suspected of fraud
Additional Findings from the Report
The 2012 FraudTrack report also shows that the number of cases recorded increased marginally from 413 to 416, although the average value of the frauds fell from £5m to £3.3m.
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.
Types of Fraud
- 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)
Bevan concludes: “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. That said, the Financial Sector has made significant investments in certain types of fraud prevention over the last few years.”
Notes to editors
A Missing Trader fraud 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.
A Carousel fraud 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. At the point of export they claim their VAT refund (20%) from HMRC. The goods in question can go round the carousel many times leading to large losses to the revenue. Sometimes the goods in question physically move and sometimes they only appear to move through the use of false paperwork.
Fraud Track is prepared by BDO LLP and is based on all reported fraud cases over £50,000 between 01/12/2011 and 30/11/2012. The sources for the database are publicly available and include the UK’s national, regional and local press.
About The Author
Simon Bevan is BDO LLP’S head of fraud services team. He has over 30 years experience of investigating fraud in the UK and over 20 other international locations. He previously set up two European market leading fraud units and has investigated frauds in both the private and public sector. Simon has worked on some of the world’s largest frauds as well as working for UK and overseas government agencies.
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