Example of a VAT Fraud in Action

‘Trader A’ is a UK based company. He purchases a large amount of high value computer cables from an EU based exporter for £100. No VAT is charged on that purchase as the goods have come from outside the UK but from within the EU.

‘Trader A’ then sells the cables to a criminal associate ‘Trader B’, for £110. He charges 20% VAT and ‘Trader B’ sends £132 (being the price of the goods plus the VAT) to ‘Trader A’.

‘Trader B’ then sells the cables to another criminal associate ‘Trader C’ for £120. ‘Trader C’ then pays £144 to ‘Trader B’ (£120 plus VAT). This chain of ‘buffers’ can go on for as long as the criminal gang wish.

For this example ‘Trader C’ then sells the same cables to an EU company and no VAT is charged on the export. The sale price of say £150 is paid by the EU company without VAT. So the organisation have made some £50 legitimate profit on buying and selling the cable.

But what should occur is that ‘Trader A’ would pay £22 the Revenue. ‘Trader B’ has collected £24 in VAT but paid £22 in VAT and therefore has to pay the difference (£2) to the Revenue. ‘Trader C’ has not charged VAT in their transaction but has paid £24 in VAT and can therefore claim that £24 back from the Revenue.

So if the enterprise is fraudulent then ‘Trader A’ can disappear (missing trader),and not pay any VAT back to the Revenue. So when ‘Trader C’ gets his rebate of £24 from the sale to the EU Company the ‘chain’ are £22 in profit, that profit having come from the Revenue.

This is a simplistic example and the numbers are of course normally enormous- add a lot of zeroes to get to the normal amounts for these sorts of cases.

The fraud can be carried out in a number of ways, the fraud is capable of being an entirely paper based exercise with ‘ghost’ goods that do not exist. Or goods may never leaving the country before being re-exported. Also a pallet of goods can be used a number of times going through the various companies, each time the goods go around a reclaim can be made- this gave rise to the moniker ‘carousel fraud’.