5 ways that countries are clamping down on VAT\GST fraud

Calculating your VAT\GST 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\GST refund. But there are some companies and individuals who put their efforts into finding ways to cheat the VAT\GST system instead.

VAT\GST fraud has been plaguing tax authorities for years. In the EU alone, VAT\GST fraudsters walk away with billions of Euro in stolen VAT\GST (the latest EU statistics, about the 2017 fiscal year, report a VAT\GST 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\GST 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\GST fraud.

1. Automated VAT\GST reporting

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

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

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

2. Real time reporting for VAT\GST

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

Real-time VAT\GST reporting removes opportunities for unscrupulous companies to hide VAT\GST 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\GST evasion.

3. 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\GST directly to the HMRC, instead of sending VAT\GST 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\GST payments, especially in the chaotic building industry.

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

4. Data mining

Advanced data analysis automation opens up new ways for tax authorities to examine data and look for patterns that indicate VAT\GST 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\GST chains and identify those involved quickly and accurately. It also helps them to spot errors, and personalise VAT\GST reclaim support so that honest companies can access their VAT\GST refund faster and with fewer obstacles.

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

5. Blockchain

Although no European country has introduced it yet, the EU is investigating the possibility of using blockchain in the struggle against VAT\GST 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\GST payments across the EU. Blockchain would also serve as the basis for VAT\GST 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\GST systems.

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

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