VAT Fraud and Missing Trader Intra-Community Fraud, MTIC Fraud

VAT fraud is big business. How big? Well it is very difficult to estimate the exact amount of money that is defrauded but the case of Federation of Technological Industries estimated that in 2002-03 the cost to the United Kingdom taxpayer was between £1.65 and £2.64 billion. By 2005-6 an EU think tank estimated that this figure had increased to some £10 billion. To put that in context the state of the art Queen Elizabeth Hospital in Birmingham cost £550 million to build and a new school costs on average £20 million.

The figures get even more mind boggling when one takes the whole of the European Union into account. The BBC has estimated that MTIC fraud costs EU governments some £170bn a year, to put this in context the annual Gross Domestic Product of Bulgaria is around £33bn.

What is a MTIC fraud? What is a carousel fraud?

These frauds involve an organised criminal group, usually a conspiracy involving many individuals and companies, stealing Value added Tax from the government. A VAT fraud is by its very nature complicated but it involves the exploitation of the VAT system within the European Union where the movement of goods between the member states is VAT free.

This means that the organised gang of VAT fraudsters charge VAT on goods and then make sure that a company who owes money to the Inland Revenue disappears (hence ‘missing trader’), the money that is owed is the proceeds of the fraud.

A more complex variation of the fraud is referred to as a Carousel Fraud and involves the goods (commonly small high value goods such as computer chips) passing between different companies and jurisdictions, in a similar way to how a carousel revolves.

What charges are commonly brought against VAT fraudsters?

This depends upon the type of fraud offences that is committed and the factual basis of the fraud.

Prosecutions can be brought under the Fraud Act 2006 however prosecutors tend to shy away from indictment under this legislation, favouring the specialist legislation and preserved common law offences. Where offences are prosecuted under the Fraud Act the prosecution tends to be under fraud by false representation under s2 of the Act.

Due to the collaborative nature of most VAT frauds needing a number of companies and individuals ‘in on the plan’ for it to succeed these offences are commonly charged as conspiracies. A conspiracy being a plan or agreement between the defendants requiring both knowledge of the plan and participation in the plan in order for guilt to be proven.

As in all offences of fraud that are not strict liability the conduct alleged by the Crown must be proven to be dishonest. Dishonesty is defined as conduct which is dishonest by the standards of an ordinary person and that defendant himself must realise that what he did was dishonest by that standard of an ordinary person.

Simpler frauds can be prosecuted under the Customs and Excise Management Act (CEMA).CEMA is commonly used to prosecute false declarations to the revenue.

Prosecutions under CEMA require the prosecution to prove that the declaration made to the Revenue was false in a 'material particular'.

There are two offences under CEMA for false declaration and the difference between them is in the state of knowledge and belief required for each offence. One is what can be called a strict liability offence, this means that the prosecution only need to prove the conduct of the individual- there is no requirement of a guilty mind. The other offence requires a mens rea or a guilty mind and the prosecution must show that the defendant intended the statement to mislead the revenue, or at the least that there was recklessness as to whether it misled or capable of being misled.

The first offence can only be tried in the magistrates' court and is punishable only by a financial penalty. The second, more serious mens rea offence can be tried in either the magistrates or crown court and in the magistrates court is liable to a fine or a term of imprisonment not exceeding six months, or both. At the Crown Court the maximum penalty is a term of imprisonment not exceeding two years and/or an unlimited fine.

The more complicated MITC and Carousel frauds are often prosecuted under the offences of either conspiracy to defraud or cheating the public revenue.

Conspiracy to defraud is a common law offence that is meant to be reserved for the most serious of offences. It is triable only in the Crown Court and carries a maximum penalty of ten years imprisonment. Guidance by the Attorney General states that this offence should only be used in circumstances where prosecution under the fraud Act 2006 is, for whatever reason, unrealistic or inappropriate.

Cheating the public revenue is also a common law offence and was specifically kept in place by the Theft Act 1968; it is triable only in the Crown Court.

In keeping with the fact that this is usually reserved for serious financial crime is reflected by the potential penalties- a maximum sentence of life imprisonment or an unlimited fine.

The offence of cheat is referred to by lawyers as a 'conduct offence' and the crown does not need to prove an actual loss instead they need to prove that a loss was intended.

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