VAT Fraud

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VAT Fraud Control of Refunds and CreditsA
Strategic Approach to Tackling VAT Losses

• Andy Leggett
• HM Customs Excise
• United Kingdom

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Scope of presentation

• The Strategic Approach in principle
• The UK Strategy to tackle VAT losses across the
  compliance spectrum
• Tackling Missing Trader Fraud, including carousel
  fraud The single biggest threat to the UK VAT
  system

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The Strategic Approach Six Key Steps

• Understand the size and dynamics of the problem
• Understand the nature and extent of the problem
• Identify resources and tactics needed to tackle
  losses
• Quantify realistic outcomes (impact)
• Agree and implement tactical plans with clear
  accountabilities
• Continuously monitor, direct and re-direct
  operational/policy and tactics

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Benefits of a Strategic Approach

• Focus on outcomes not outputs
• Prioritisation, co-ordination and targeting of
  activity and resources
• Clarity for staff, what the goal is and what is
  expected of them
• If published, can send a deterrent message to
  potential fraudsters
• Demonstrate proportionality of actions
• Provides a rationale for making tough or
  presentationally difficult decisions
• Knowledge of whether tax losses are rising or
  falling

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Downsides to the Strategic Approach

• Estimating Tax Gaps / measuring outcomes is
  difficult
• Presentational issues relating to the size of
  losses
• How did losses get so high?
• What are you doing about it?
• Why have you not done anything about it before?
• Delay in outcome data and visible impact
• No direct link between operational outputs and
  strategic outcomes
• Accountability for success or failure of the
  Strategy

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Estimating VAT losses

• Two separate but complementary approaches
• top-down - difference between theoretical amount
  of VAT that should be due and actual VAT receipts
  VAT Gap
• bottom-up uses operational and intelligence
  data to corroborate top-down approach and
  attribute losses to specific problem areas.

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Top-down (VAT Gap) estimate

• Involves
• assessing the total amount of expenditure in the
  economy that is theoretically liable for VAT
• estimating the tax liability on that expenditure
• deducting actual VAT receipts and
• assuming that the residual element - the gap - is
  the total VAT loss due to any cause including
  error, non-compliance, avoidance and fraud.

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Top Down VAT Gap
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UK VAT Strategy

• Launched April 2003 to reverse the trend of an
  increasing VAT Gap
• Creating an environment that fosters voluntary
  compliance and deals robustly with those that
  choose not to comply
• Creating an environment in which VAT fraud and
  avoidance become less economically viable
• Target to reduce VAT Gap from 15.8 to no more
  than 12 by March 2006

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Compliance Continuum

New Business
Assure or Educate?
RISK
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Bottom-up estimates

• Top-down measure is comprehensive but gives no
  indication of the nature of the loss
• Use operational and intelligence data to
  corroborate the top-down approach, and helps
  attribute losses to particular problem areas

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Bottom Up Estimates

• Missing Trader Fraud
• Avoidance
• Failure to Register for VAT
• General non-Compliance

• 1.06 - 1.73 bn
• 2.5 - 3.0 bn
• 0.4 - 0.5bn
• 2.5 - 4.0 bn

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Nature of VAT losses

• errors on VAT returns
• failing to submit VAT returns on time
• Late or non- payments
• deliberately under-reporting of liability on VAT
  return
• abusive avoidance schemes to reduce or avoid
  liability
• operating a business in the shadow economy
• criminal attacks against the VAT system.

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Tackling the Spectrum of Losses

• 1000 extra staff
• Encourage voluntary compliance
• Outreach programme
• Crack down on deliberate non-compliance
• Targeting risk
• Strengthened Debt Management
• Target Shadow economy
• Tackling avoidance
• Litigation
• Legislation

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VAT Missing Trader Fraud
Intra-EU supply 970,000 VAT Nil. Reclaims
from HM Customs Excise VAT paid on UK supply
- 166,250
Intra-EU supply 1,000,000 VAT Nil
(A) EU Supplier
VAT not paid to HM Customs Excise tax loss
of 157,500
(E) UK Broker
UK supply 900,000 VAT
UK supply 950,000 VAT
UK supply 920,000 VAT
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VAT Missing Trader fraud scale and nature

• 1999 VAT loss 1.2-2.3bn and growing at
  0.45-0.75bn VAT per year.
• The skys the limit
• Organised attack on the VAT system by criminal
  gangs
• Main sectors affected mobile phones and
  computer components
• Creating unfair competition for legitimate
  businesses

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VAT Missing Trader fraud strategic response

• Nationally co-ordinated strategy launched in
  September 2000
• Aim to stop the fraud before it can begin
• Where that does not succeed, identify fraud at
  the earliest point and stop it
• Top VAT fraud priority therefore, sharper
  priority focus
• Enabled the re-deployment of existing resources

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VAT Missing Trader fraud strategic response

• Tighter controls at all points in supply chain
• Development of new regulatory and enforcement
  tools
• New legislation Joint and several liability
• Working with legitimate business in affected
  sectors
• Publicity
• Working with other EU states
• Sharply focused and targeted criminal
  investigations

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VAT Missing Trader fraud progress 2000-2003

• Rapid growth of fraud now halted
• Fraud in decline for the first time since 1999
• VAT losses fallen to range 1.06bn-1.73bn by
  March 2004 25 fall in the year
• Losses one third lower than peak levels annual
  saving of up to 800m VAT a year

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VAT Missing Trader Fraud Current State of Play

• Operational evidence that trade has slowed but
  stabilised
• Fraudsters changing their tactics
• Greater use of non-EU supply chains
• Mobile phones and computer parts still the main
  commodities
• Refresh the Strategy to meet new challenges

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Impact of the VAT Missing Trader Fraud Strategy
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Does the Strategic Approach work?

• Baseline 2003 VAT Gap 15.8
• Target to reduce the VAT Gap to 12 by 2006
• At April 2004 the VAT gap was 12.9
• Similar successes in other taxes
• Tobacco
• Oils

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