5 ways that countries are clamping down on VAT fraud

Calculating your VAT return takes a lot of time and effort, even though it is satisfying when you’ve processed everything successfully and your company gets a sizeable VAT refund. But there are some companies and individuals who put their efforts into finding ways to cheat the VAT system instead.

VAT fraud has been plaguing tax authorities for years. In the EU alone, VAT fraudsters walk away with billions of Euro in stolen VAT (the latest EU statistics, about the 2017 fiscal year, report a VAT gap of €137 billion). That’s money that member states should be able to spend on infrastructure and services for their citizens, but instead it’s going into the pockets of petty thieves and crime rings, who use it to fund other, more serious crimes.

Countries have been trying to control VAT fraud for a number of years, with mixed success. However, recent tech innovations are coming to help. Here are 5 ways that tax authorities around the world are clamping down on VAT fraud.

  1. Automated VAT reporting

More and more countries are introducing VAT automation to make it harder for shady businesses to dodge their VAT obligations.

In the UK, for example, the Making Tax Digital scheme requires businesses with an annual revenue of over £85,000 to file VAT returns online, as a first step towards a fully automated VAT system. In Greece, a new myDATA online taxpaying platform has been introduced to enable companies to submit VAT and corporate tax reports automatically. Russia and Italy have similarly moved towards digital, automated VAT tax reporting systems.

VAT automation strengthens the ability of tax authorities to spot and block fraudulent claims. It closes a number of loopholes that allow VAT fraudsters to flourish, by improving the paper trail that shows up fraudulent VAT transactions, and making it easier for generally law-abiding companies to fulfil their VAT obligations correctly.

  1. Real time reporting for VAT

Another weapon in the fight against VAT fraud is real-time reporting. Russia is among the first countries to introduce real-time VAT reporting, with a new system that tracks every transaction across the country within 90 seconds.

Real-time VAT reporting removes opportunities for unscrupulous companies to hide VAT transactions, since tax authorities can use artificial intelligence and data analysis techniques to spot errors and signs of fraud much earlier, and respond faster to the first signs of VAT evasion.

  1. Extension of domestic reverse charges

The domestic reverse charge scheme was introduced a few years ago in the UK for business-to-business sales of specific goods and services, including mobile phones, computer chips, and wholesale gas, electricity and telecommunications. Where domestic reverse charges are applicable, they require the customer to pay their VAT directly to the HMRC, instead of sending VAT monies to the supplier.

In 2020, the UK will extend the domestic reverse charge procedure to the construction industry, offering another way for tax authorities to regain control over VAT payments, especially in the chaotic building industry.

It’s hoped that by cutting out the middleman in VAT collection, tax authorities will be able to reduce the amount of VAT withheld by dodgy companies.

  1. Data mining

Advanced data analysis automation opens up new ways for tax authorities to examine data and look for patterns that indicate VAT fraud. This technology was introduced in Benelux countries in 2019. A process called Transactional Network Analysis (TNA) uses automation to select information according to risk indicators, and then apply AI to analyse it more deeply.

With these advanced data mining tactics, Benelux tax authorities can detect fraudulent VAT chains and identify those involved quickly and accurately. It also helps them to spot errors, and personalise VAT reclaim support so that honest companies can access their VAT refund faster and with fewer obstacles.

Access to and participation in the TNA was extended to other EU Member States in mid-2019.

  1. Blockchain

Although no European country has introduced it yet, the EU is investigating the possibility of using blockchain in the struggle against VAT fraud. With blockchain, each taxpayer could add their digital invoices to their country’s tax reporting system, which would then share them on a blockchain-based network. Every EU country would be able to access that network, so that they could quickly and easily verify VAT payments across the EU. Blockchain would also serve as the basis for VAT automation.

The EU announced that they intend to invest €340 million into the blockchain project, while tax authorities in Finland, Sweden, and Germany are already working on blockchain-based VAT systems.

To keep on top of all the changes in filing successful VAT returns in the EU and other countries around the world, download our eBook.

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