MTIC Carousel Fraud

One of the most prevalent types of VAT fraud is the missing trader intra community (“MITC”) or carousel fraud, whereby fraudulent businesses interpose themselves in a supply chain trading in high value low bulk goods within the EU in order to obtain, and disappear with, large amounts of VAT on the transactions.

The main trade products targetted are usually grey market mobile phones and computer chips, which are either old model stock, or excessive production sold into the grey market by the manufacturers. The types of goods involved has changed of late and HMRC are now targetting trade in other industry sectors including non-electronic (eg food and toiletry) wholesalers.

The Fraud Explained:

The goods are purchased from a supplier in the EU by a company registered for VAT in the UK, Company A, soon to become the missing trader in the fraud. The goods are correctly zero rated for VAT as an intra community transaction between two VAT registered businesses, and are then sold on inclusive of VAT by Company A to another UK trader, Company B. The latter may be an innocent party, or more likely will be part of the fraud fulfilling the role of a ‘buffer’ to conceal the identity of Company A from the VAT authorities. Company B sells the goods inclusive of VAT to another UK trader, Company C who again may be an innocent party or a second line buffer. Company C sells on to Company D who exports the goods from the UK to the original EU supplier, who in turn will sell back to Company A, and so the ‘carousel’ continues until it is identified by Customs.
The transactions may be conducted on a ‘back to back’ basis between the various dealers, with the goods remaining in a third party warehouse after first entry into the UK. The goods will often be sold on four or five times within a matter of hours before finally being exported to the original EU supplier. The transactions are high value with correspondingly large sums of VAT being charged in the supply chain, and hence the attraction to fraudsters.

Company A is the essential ingredient in MTIC frauds, the missing trader, and is set up solely to acquire goods VAT free and sell inclusive of UK VAT, without completing a VAT return and accounting for the VAT received. This VAT represents the financial benefit in such frauds. Company A requires a VAT registration number at the outset, which it may obtain by applying to register a business for VAT, disguising the activities of the business to avoid scrutiny by Customs, or simply by ‘hi-jacking’ another company’s VAT registration number and creating false invoices bearing this number.

On the sale of the goods by Company A to Company B, the fraud usually requires payment to be made by Company B, and in some cases by Company C, to both Company A and the EU supplier. Often the VAT element of the transaction is paid to Company A and the balance to the EU supplier, either to an overseas bank account in its own country or to a bank account in the UK. In due course, Company A, the missing trader, will disappear having achieved its aim of obtaining substantial amounts of VAT on the sale of the goods in the UK, and those behind Company A may re-surface in another form to initiate another carousel, possibly buying from the same EU supplier or a new supplier.

Payments to the EU supplier by Company B are referred to as ‘third party payments’, although it has been known for fourth and fifth party payments to have taken place in some frauds where Companies C and D make the payments. In some cases, the VAT inclusive price is paid to the EU supplier, thereby immediately removing the VAT evaded from the jurisdiction of the UK authorities.

HMRC’s Prosecution and Civil strategies:

On the basis of the current case law, indictments in carousel frauds are usually  drafted to include the common law offence of cheating the revenue offence, or conspiracy to cheat under S 1(1) of the Criminal Law Act 1977, where the ‘VAT’ evaded in the fraud is often referred to as ‘monies purporting to be VAT’. Indictments may also include offences relating to converting or removing the proceeds of criminal conduct from the jurisdiction of the UK authorities, contrary to Proceeds of Crime Act 2002 ss 327-329.

In the alternative HMRC have adopted a strategy of withholding monies to the UK Exporter (whom reclaims) thereby forcing that entity to lodge a civil appeal before the VAT and Duties Tribunal (now the First-Tier Tax Tribunal). These appeals are part of the Civil regime however HMRC use leading criminal prosecution barristers to argue their case before the Tribunal.

How we can help:

We have the experience and knowledge to assist and defend allegations against our clients in either the civil regime before the courts and the tax tribunals or before the criminal courts. We can also advise our clients on how best to avoid being affixed with constructive notice (the legal concept that a trader should have known) of fraud in the supply chain by having stringent due diligence procedures in place.

Has HMRC made you a part of an extended verification exercise or visited and served you with Notice 726? We have a wealth of experience and are able to provide clear advice to assist you in managing HMRC’s investigation and in improving your Due Diligence process. Our Tax Disputes Solicitors and Barristers are here to help you. To contact one of our specialist VAT Lawyers please click here or call 02071830529.

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