07 05 2018

UK Updates Missing Trader VAT Fraud Guidance For Traders

In a first update since August 2006, HM Revenue and Customs has redrafted its value-added tax guidance on the due diligence businesses must undertake to ensure they do not engage in transactions with fraudsters.

The guidance was initially released following the European Court of Justice's ruling in joined cases Optigen Ltd (C-354/03), Fulcrum Electronics Ltd (C-355/03), and Bond House Systems Ltd (C-484/03) v. HMRC, which was released on January 12, 2006.

In this landmark judgment, the ECJ ruled that, in a supply chain, each transaction must be considered on its merits as a separate economic activity. It said the right of a taxable person to deduct VAT cannot be affected by the fact that, without that person knowing or having any means of knowing, another transaction in the chain is vitiated by fraud.

It added that "transactions, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity, within the meaning of the Sixth VAT Directive, where they fulfill the objective criteria on which the definitions of those terms are based." The Court held that "the right of a taxable person who carries out such transactions to deduct input VAT cannot be affected by the fact that in the chain of supply of which those transactions form part, without that taxable person knowing or having any means of knowing, another prior or subsequent transaction is vitiated by VAT fraud."

HMRC advises that VAT-registered businesses should read the leaflet, stating: "If you do not take reasonable care and HMRC can demonstrate that you knew or should have known that your transactions were connected to missing trader fraud then you may lose your entitlement to claim the input tax linked to those transactions."

Missing trader fraud – commonly known as "carousel fraud" – is the most prevalent and costly form of value-added tax fraud, which is estimated to cost member states EUR50bn (USD60bn) a year. Carousel fraud involves the exportation of goods – typically small, high value items – to another member state (without VAT) and them being then sold to the domestic market including VAT. The goods are then re-exported, often back to the country of origin, giving rise to an input tax credit, while the VAT collected from the domestic sale is not remitted and the trader disappears. This process is typically repeated and the fraudsters often create chains of false invoices to throw tax investigators off their trail. Innocent traders can be caught in these supply chains.

Among other things, the leaflet, which sets out the checks that should be undertaken by businesses to identify potential fraud, also includes information on the new offense of "Corporate Failure to Prevent the Criminal Facilitation of Tax Evasion," which entered into force on September 30, 2017. Companies that fail to prevent representatives acting on their behalf from facilitating tax evasion can be prosecuted and if found guilty can be subject to an unlimited fine.