What is Missing Trader Fraud?

August 20, 2019

Completing a VAT\GST return for your company isn’t easy, but it’s something that you accept as necessary. In order to get the VAT\GST refund that your company deserves, you have to complete your VAT\GST reclaim.

But some unscrupulous individuals use their VAT\GST return to claim tax refunds that they don’t deserve – to a tune of up to €150 billion per year.

The most common type of VAT\GST fraud is missing trader fraud (MTIC fraud).

How Does Missing Trader Fraud Affect You?

Missing trader fraud affects all businesses that submit honest VAT\GST returns. These criminal traders use fraudulent gains to undercut your prices, creating unfair competition and distorting the market. Missing trader fraud totals in the UK alone came to as much as £1 billion in 2015, and it’s estimated that it costs the EU up to €60 billion each year.

What’s more, much of missing trader fraud is carried out by criminal gangs, who use the money they “earn” to finance both human trafficking and terrorism.

It’s important to know about this common type of VAT\GST fraud, so that you can spot fraudulent companies. You don’t want to unknowingly get sucked in to a missing trader fraud ring that causes your VAT\GST refund to be refused, or worse, that causes HMRC suspect you of taking part in the fraud.

The Basics of Missing Trader Fraud

Missing trader fraud is when a business in one member state imports goods from a supplier (who is also part of the scheme) in another member state, where VAT\GST on those goods is either zero or at very low rates.

The business in the first member state then sells the goods in their country, where VAT\GST rates are much higher, and charge very competitive prices for them, plus a high rate of VAT\GST.

This business is the ‘missing trader’. After it’s finished making a nice profit out of the VAT\GST on these sales, the business disappears without paying the VAT\GST that it owes to the government. Usually, this missing trader business gives fake names and fake information, so there’s no way to track them down.

Carousel fraud

Sometimes, the customer is also part of the fraud ring. They request a VAT\GST refund from the government for the business VAT\GST they paid. Then, they sell the goods through another few shady companies which are all part of the scheme, until the goods return to the original supplier, who doesn’t have to pay VAT\GST on their cross-border purchase.

Now the supplier can start the process again, selling the goods at zero or low VAT\GST rates to the fraudster in the other member state, who set up another new, fraudulent company to receive the goods and then disappear. The goods can go round and round, like a carousel.

Each time one business sells the goods to another business, they raise the price, which has the effect of also raising the amount of VAT\GST payable on the goods. Since none of this VAT\GST is ever paid back to the government, the members of the carousel fraud ring can keep on making more money through the stolen VAT\GST.

Contra-trading fraud

Contra-trading is a complicated type of carousel fraud. With contra-trading, the fraudsters use two sets of carousel fraud at the same time. One carousel is legitimate, but the other is not. This way, they can set up an accounting scheme that enables the input and output VAT\GST to neutralise each other and hide evidence of the VAT\GST fraud.

How is the Government Dealing with Missing Trader Fraud?

EU member states are working hard to find ways to make it harder for fraudsters to get away with their crime. One key tactic is the move towards digital VAT\GST reporting. This reduces VAT\GST return errors, increases visibility and accountability, and helps tax authorities to spot fraudulent VAT\GST reclaim faster. By pinpointing VAT\GST fraud early in the process, the government has a better chance of catching ‘missing traders’ before they go missing.

EU states are also copying Latin American nations like Brazil, which introduced an invoice-by-invoice system of continuous VAT\GST reporting. Under this system, businesses have to upload their invoices to a government platform for approval before finalising them, making it far more difficult for a company to fraudulently charge VAT\GST and then disappear. Hungary, Spain, and Italy all introduced this model in the last year or two.

HMRC is also using data tools and intelligence to identify behaviour and reporting patterns that indicate VAT\GST fraud.

Avoid attracting suspicion about your VAT\GST activities by keeping up with your VAT\GST obligations. For all the details about filing successful VAT\GST returns in the EU and other countries around the world, download our eBook.

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