Missing Trader Intra Community (MTIC) fraud and VAT evasion
The value added tax (VAT) is levied on goods and services at every stage of production. Under EU tax regulations, there is no VAT due when a VAT-registered business in an EU member state supplies goods or services to a VAT-registered company located in a different EU member state.
For example, if a business in Greece (Company A) sells a consignment of paperclips to a company in Slovenia (Company B), that supply is not subject to VAT.
However, as the Slovenian company, in this case, is VAT registered, it is obliged to charge VAT when it sells those goods to its customers within Slovenia.
In terms of the law, the company must account for any VAT collected when making its regular VAT returns. If the company collected more VAT than it paid out, then it must pay that VAT to the local tax authority in accordance with local regulations.
MTIC and Carousel VAT Fraud
However, the EU regulations also open up a space for VAT fraud.
In the case described above, Company B charges VAT on the goods but does not pay VAT to acquire them. In regards to the types of VAT fraud, a very simple form of VAT fraud would be for Company B to simply disappear without accounting for the VAT.
That is a simple form of Missing Trader Intra Community Fraud (MTIC fraud). ‘Missing trader’ because the business effectively goes missing without accounting for VAT. ‘Intra-community’ because the trade occurred within the EU, between EU member states.
In the real world, tax administrators and law enforcement agencies take active steps to detect and punish VAT evasion. These efforts are aided by advanced technology, such as mandatory e-invoicing. Criminals, therefore, often take elaborate measures to conceal the fraudulent nature of their activities (and to increase the scale of their fraudulent activities). In the EU, this commonly takes the form of carousel fraud.
What is carousel VAT fraud?
Carousel fraud, also known as Missing Trader fraud or VAT carousel fraud, is a type of fraudulent scheme related to Value Added Tax (VAT) in the European Union (EU). It involves a series of transactions where goods are repeatedly bought and sold across borders, taking advantage of the EU’s VAT rules (VAT fraud).
Here’s how carousel fraud/missing trader fraud typically works:
- A fraudster imports goods from another EU country without paying VAT on the purchase, claiming an exemption for intra-community transactions.
- The fraudster then sells the goods to a domestic buyer, charging VAT on the sale. However, instead of remitting the VAT collected to the tax authorities, the fraudster disappears or closes the business without paying the owed VAT.
- The domestic buyer, who is often an innocent party unaware of the fraud, claims a refund from the tax authorities for the VAT paid on the purchase.
- The fraud continues as the goods are sold again and again through a chain of companies, each time charging and collecting VAT but failing to remit it to the authorities.
Organised crime groups also play a significant role in VAT carousel fraud due to their expertise in executing complex and large-scale fraudulent schemes. It’s important to note that VAT fraud involving organised crime groups is a highly illegal activity and subject to significant penalties. Governments and law enforcement agencies continually work to combat these fraud schemes through improved legislation, enhanced cooperation, and increased enforcement efforts.
Why is it called carousel fraud/missing trader fraud?
The sketch above is very simple. Goods go from company A to company B to the customer. Company B goes missing, pocketing the VAT.
Now suppose the goods don’t land up being sold to consumers. Instead, the transactions pass through a series of companies.
To perpetuate a carousel fraud scheme, companies often create a number of phony shell companies to conceal the true nature of the transactions in a complex web.
As the shell companies continue to trade with each other, the transactions go round and round like a carousel.
It’s possible for the same goods to be traded many times between companies within the carousel fraud scheme network. Indeed, often these trades don’t actually occur; that is, goods don’t actually move from one party to another, but invoices are issued.
A transaction between two entities is relatively simple for tax authorities to monitor. In such cases, if a business neglects to pay the VAT it owes or fraudulently inflates the VAT it claims back, a simple audit may reveal the fraud.
VAT fraud is much harder to investigate, especially as they involve multiple cross-border transactions. Busting the most sophisticated carousel schemes often requires coordination between law enforcement agencies across the EU.
How carousel VAT fraud affects your business
Broadly speaking, carousel schemes affect everyone. It is a type of deliberate tax fraud that deprives governments of revenue and shifts the tax burden onto law-abiding taxpayers.
More specifically, governments take the threat of carousel VAT fraud seriously and are continually implementing new measures to deter the schemes.
These measures will affect your business in two ways. First, lawmakers consistently update VAT policy to close loopholes and make VAT evasion harder. Your business needs to be able to adapt to policy changes as they happen in order to ensure you remain fully VAT compliant.
Second, regulators are increasingly turning to technology to combat missing trader VAT fraud. In many cases, businesses are obliged to upgrade their compliance technology to comply with real-time reporting, e-invoicing and other VAT innovations.
Moreover, technology makes it much easier for tax offices to detect anomalous transactions. That means that if your business is in any way non-compliant, even unintentionally, authorities are more likely to detect that noncompliance and subject your business to fines and other penalties.
What Should You Do
You now know the importance of VAT compliance and the effects it can have on your company. Now, more than ever, companies need advanced processes to ensure they remain 100% VAT compliant in all markets.
As a global VAT refund and compliance specialist, VAT IT will ensure your business is always 100% VAT compliant while maximising reclaim opportunities. Get in touch for a customised VAT solution for your company.
