VAT, or, value added tax, is the main consumption tax in the OECD and a major source of revenue for governments around the world. It’s no surprise that tax authorities take VAT evasion extremely seriously. Tax offices have developed sophisticated technology to monitor VAT compliance and detect fraud. In addition, new rules make VAT evasion harder to pull off.
For law-abiding businesses, rules and mechanisms to detect VAT fraud are not just of theoretical interest. High-tech monitoring means that even accidental VAT noncompliance is likely to be detected and punished. Businesses, therefore, need to ensure they have the latest software and processes to ensure they are always 100% VAT compliant.
In addition, regulatory measures to prevent tax fraud, such as e-invoicing and real-time reporting, can place an additional administrative burden on businesses. Fortunately, companies can achieve more efficient results, and reduce costs and hassle, by automating their VAT compliance.
VAT fraud is a form of tax evasion. VAT fraud is an intentional act that involves either wilfully avoiding paying the VAT for which you are liable or claiming a refund for VAT to which you are not entitled.
Such VAT fraud schemes or any form of VAT non-compliance leaves an entity open to fines and other penalties. In the case of intentional fraud, the penalties are even more serious. In many cases, tax authorities will initiate criminal action that could result in prison terms.
Missing trader fraud, or MTIC fraud, is a common form of VAT fraud. It’s fairly straightforward, but to understand how it functions, you need to appreciate how VAT works. VAT is charged at every point in the value chain. Transactions between VAT-registered businesses therefore often include VAT.
Businesses that charge VAT are obliged to account for and pay the VAT collected to the relevant tax authority.
In the case of missing trader fraud, the business charges the VAT but does not pay the collected VAT to the relevant tax office.
To reduce incidences of missing trader fraud, regulators might pass rules shifting the VAT liability for accounting for VAT. For example, the UK introduced a domestic reverse charge requirement for the construction industry. According to the regulations, a contractor must account for the VAT due on services acquired from a subcontractor (i.e. the customer manages the VAT).
Now, what is carousel scheme? Carousel scheme, otherwise known as carousel fraud, is a type of missing trader VAT. In the case of VAT carousel fraud, however, the fraudsters make payments between a number of shell companies to disguise the nature of the transactions.
Carousel fraud often attempts to take advantage of EU cross-border VAT laws. This form of fraud costs the EU billions each year. Detecting and punishing sophisticated carousel fraud schemes might involve numerous agencies from multiple states.
In the normal course of business, most VAT-registered companies both charge VAT and incur VAT on goods and services. VAT rules are designed so that a business can claim back any VAT expended on business expenses in excess of VAT received. (In VAT jargon, you can recover the sum of input VAT that exceeds output VAT.)
The system opens the possibility for entities to fraudulently claim back VAT on fictitious trades, i.e. on purchases that never actually took place. To enact this type of fraud, a trader may establish businesses simply for the sake of making fake trades.
VAT tax evasion produces serious losses that “mean that ordinary people and businesses are left to pick up the shortfall through other taxes to pay for vital public services”. Those are the words of EU Commissioner for Economy Paolo Gentiloni.
Gentiloni was commenting on the EU’s 2021 VAT Gap Report, which shows that cross border transactions between the EU Member States lost an estimated €134 billion VAT in 2019.
Experts ascribe the gap between expected VAT revenue and collected VAT in large part to VAT fraud and VAT avoidance measures. VAT is one of the most important sources of revenue in the EU and globally. VAT fraud at scale thus results in less money for public services and investment in infrastructure.
The digital economy creates new challenges for tax authorities. To reduce VAT evasion on e-commerce sales, new rules in the UK and EU make online platforms responsible for managing VAT on sales.
Under these regulations, when businesses sell their goods via online marketplaces, such as Amazon and eBay, the platform itself charges and accounts for the VAT on the sale.
In response to VAT fraud, tax offices have implemented advanced technologies to monitor VAT compliance. Some tax offices have developed bots that check the internet and other electronic databases (such as payment platforms) to identify transactions and flag suspicious activity.
A number of tax offices now also require digital VAT return submissions. In order to comply with these requirements, businesses need effective VAT software that ensures returns are completely accurate and filed in the correct format.
Policymakers are continually adapting regulations to combat increasingly sophisticated types of VAT fraud. As a business, you need to ensure you stay ahead of changing VAT rules.
Sometimes changing regulations have important business consequences. For example, new reverse charge rules for the construction industry put some UK subcontractors at a cash flow disadvantage. In order to optimise VAT compliance and plan for changing scenarios, businesses will usually benefit from up-to-date strategic advice from leading VAT specialists.
Advanced monitoring technologies also make tax offices more likely to detect anomalies in your VAT returns. If you make errors in your returns, or claim VAT to which you are not entitled, you could face serious penalties, even in the case of accidental non-compliance.
While fraudsters can cause VAT losses, it’s important to ensure your business is staying VAT compliant as well to avoid VAT fraud. Remarkably, 27% of VAT claimed is based on non-compliant or missing invoices. Without the appropriate technology and expertise, your business risks breaching VAT compliance rules. Alternatively, many businesses don’t claim the VAT to which they are legitimately entitled because they don’t have the tools and knowledge to make an accurate, timely claim.
There’s a simple and effective solution. As world leaders in VAT compliance and recovery, VAT IT’s powerful technology-driven VAT service ensures your business is always 100% VAT compliant, everywhere you do business.
Our VAT specialists will maximise your VAT reclaim opportunities while ensuring you are always fully compliant. Wondering which VAT products are best for you? Get in touch with VAT IT for a fully customised VAT solution for your business.
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