Value Added Fraud
It was Maurice Lauré, joint director of the French tax authority, TVA, who invented the system in the 1950s and applied it, first, to large businesses.
The idea of VAT is that it does not matter how many transactions an item goes through in its manufacture from raw material to finished product; the tax is collected only on the final price paid by the consumer. It is, therefore, an indirect tax – collected and paid by someone other than the person who actually bears the cost.
At all stages in an item’s manufacture, for example, VAT is charged by a supplier but can be claimed back by the purchaser. The only person who cannot claim VAT back is the purchaser who ultimately uses it.
Tax
evasion
Tax evasion has been a fact of life
since the earliest levies were introduced and people began searching
for ways of avoiding their payment, both legally and illegally. Even
so, for the past five decades VAT has been regarded as no more vulnerable
to fraud or avoidance than the sales taxes and other systems it
replaced. Recent events, however, have called this judgment into question.
In the last few years, a number of cases have come to light which indicate that a method of robbing governments of the tax – known as carousel or missing trader fraud – is happening on a greater scale and reaping far larger dividends for the criminals involved than anyone previously imagined.
In February 2005, Operation Domino resulted in the arrests of a number of people on charges relating to a £580m VAT fraud.
This crime was first spotted by the Steurfahndung, the German money laundering and organised crime department. It involved buying VAT -free products from another EU state, selling them on with VAT added and then disappearing without paying the tax (whose rate is 17.5 per cent in the UK).
More than 200 officers took part in raids in Germany, Holland, Spain, Norway and the UK in this case, in which mobile phones and computer chips – popular imports with carousel fraudsters – are believed to have been involved.
Six months later, four individuals were found guilty in a UK court for their involvement in a carousel VAT fraud that is estimated to have cost HM Revenue & Customs over £40 million in two years.
A devastating blow to criminals
In
2006, customs officials announced they had dealt
a devastating blow to criminals defrauding the British taxpaying
system of billions of pounds every year. They had discovered that the funds of every individual arrested and charged with carousel fraud in the past two years were being channelled through the same small Caribbean bank: First Curaçao International Bank (FCIB).
A joint Anglo-Dutch operation raided premises in London, the Netherlands and South Wales, and the bank was shut down in September 2006. The amount involved is said to be in the region of £5bn.
This single case confirmed the worst fears of UK economists who were surprised by an unexpected trade gap in figures released by the Office for National Statistics for July 2005. These showed the gap had widened by almost £1bn in a single month, leading some to believe that missing trader mobile phone fraud had distorted the figures.
| Statistics issued by HM Revenue and Customs in July 2006 indicated that
VAT fraud in the
UK had reached record levels. Criminal activity, it said, accounted
for £7.4bn in UK the last quarter alone. Three months later, the British Home Secretary, John Reid, revealed to a G6 meeting of interior ministers from Britain, France, Germany, Italy, Spain and Poland, that there was an explicit link between fundraising by terrorist groups and the European-wide carousel fraud which is now believed to be worth £33 million (€50m) to those involved. According to one report, the explosion of carousel fraud is costing the European Union the same as the total common agricultural policy spending, and five times more than expenditure on employment and social affairs. | By
late 2006 it became clear that the court cases were not isolated
incidents and the trade gap figures did, indeed, reflect a serious criminal
impact on UK revenues. And the country which gave us VAT – France – has announced that it has launched a probe into the fraud after finding “unusual flows of merchandise between the UK, France and Poland” in the first six months of 2006. What no one expected, when VAT was first proposed, was that it would be criminals and terrorists who would be using the scheme to “add value” to their exploits. Now that the enormity of the problem has been realised, ways will be found to slow the carousel, reduce the losses and catch the criminals. And VAT will almost certainly survive as the favoured form of levying taxes. |
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Value added fraud
