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European Union
In European Union (EU) the European Union Value Added Tax ("EU VAT") allows merchants to charge VAT on the sale of goods when they sell goods to another member state. Figures from Eurocanet, a European Commission sponsored project, released in September 2006, appear to show that the United Kingdom is the main victim of this fraud, having lost an estimated 12.6 billion during 2005-6, followed by Spain and Italy which each lost over 2 billion during this period.[1] From 1 June 2007, the UK is introducing changes to the way that VAT is charged on mobile phones and computer chips to help combat fraud.[2] [3] UK plans to introduce changes to the way VAT is charged on a wide range of goods from December 2006 were aborted because of failure to reach an agreement with other EU member states.
Missing trader fraud VAT that the fraudster reverse charged. Typically the fraudster/importer must pay over the reverse charged VAT to his or her government, but not immediately depending on the day of the month the transaction occurred. Therefore, the fraudster must sell the goods before the fraudster must turn in the reverse charged VAT.
Carousel fraud
A much more complex example is for several businesses to act in concert. In this situation, the goods are sold to a series of companies, before being exported again. The goods therefore go round in a 'carousel'. This is best explained by way of an example: Consider a trader based in the UK. He buys from France a consignment of mobile telephones for 1,000,000. He pays the French telephone manufacturer for the goods. The goods are then shipped to a dock in the UK. No VAT is charged on that shipment. The trader now sells those telephones to a conspirator, for 1,100,000. He charges 17.5% VAT (at 4th January 2011 the current standard VAT rate in the UK is 20%) and the conspirator sends 1,292,500 (being the price of the goods plus the tax) to the trader. This conspirator then sells the goods to a third conspirator for 1,200,000, charging VAT on that sale. The third conspirator pays 1,410,000 to the second. This may continue for many conspirators; however, three will suffice for an example. The third trader now sells the telephones to a German company, which may well be innocent. No VAT is charged, and the sales price of 1,500,000 paid by the German company without VAT. So far the conspirators have made a profit of 500,000 perfectly legitimately on buying and selling mobile telephones. In an honest operation, the first trader would pay 192,500 to HM Revenue and Customs (the UK's VAT collection agency). The second trade has collected 210,000 in VAT but paid 192,500 in VAT and therefore has to pay only the difference (17,500) to HM Revenue and Customs. The third trader has charged no tax on its sale but has paid 210,000 in VAT and can therefore reclaim 210,000 from HM Revenue and Customs. In the fraud, the first business vanishes without paying the VAT to HM Revenue and Customs. When the last business in the chain collects 210,000 on the export, all of the businesses can vanish, 192,500 better off at the expense of HM Revenue and Customs. As this business is removed from the vanishing party, it is difficult for HM Revenue and Customs to show the links in the chain and thereby refuse to refund the VAT on the export. In terminology, each business described above is called a "buffer". In a real case there can be many buffers, all helping to blur the link between the final reclaim and the original importer, which will vanish. This entire series of transactions can occur without the goods ever leaving the dock in the UK before being re-exported. Furthermore the same telephones can be used again and again going through the various buffers, each pass around the 'carousel' bringing reclaimed VAT to the fraudsters.
Contra-trading
Contra-trading fraud is the further evolution of carousel fraud, and evades government detection by using two carousels of traded goods where one carousel is legitimate and the other is not thereby allowing an accounting scheme where the input and output VATs neutralize each other thereby concealing the fraud.[4] Jaswant Ray Kanda, of Sutton Coldfield, West Midlands and his gang were key players in this type of carousel fraud[5] . Customs Officials who were investigating them called their operation Maypole as they had clear evidence that Kanda and his gang sent the same lot of goods round and round again.
References
[1] [2] [3] [4] [5] Oliver, James (2006-09-22). "VAT scams hit UK taxpayers hard" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 5369776. stm). BBC News. . "Clampdown on VAT fraud" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 5355426. stm). BBC News. 2006-09-18. . "New anti-fraud VAT rules come in" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 6467453. stm). BBC News. 2007-03-19. . Olympia Technologies Ltd. VAT Tribunal #20570 (2-15-08) "54 million VAT fraud gang is jailed" (http:/ / www. birminghammail. net/ news/ worcestershire-news/ tm_headline=-54-million-vat-fraud-gang-is-jailed& method=full& objectid=18421584& siteid=50002-name_page. html). Birmingham Mail. 2007-01-08. . Retrieved 2008-11-21. [6] Phil Kemp (2008-10-04). "Fraudster's 'pop star' lifestyle" (http:/ / news. bbc. co. uk/ 1/ hi/ uk/ 7650883. stm). BBC News. .
Federation of Technological Industries v Customs and Excise Commissioners ([2004] EWCA Civ 1020) European Court of Justice decision EUECJ/2006/C35403 (http://www.bailii.org/eu/cases/EUECJ/2006/ C35403.html) HM Revenue & Customs PN03 2006 Budget Release Successful Prosecutions in 138m "Carousel" Frauds 21 Convicted, Sentences of 202 Years (http://www. rcpo.gov.uk/rcpo/pressoffice/news/20080929_1.shtml) The Fraudsters - How Con Artists Steal Your Money (http://www.dilloninvestigates.com/index_files/Page390. htm) Chapter 7 - The Cash Carousel (ISBN 978-1-903582-82-4) by Eamon Dillon, published September 2008 by Merlin Publishing
External links
Experts stumped by leap in trade gap (http://www.guardian.co.uk/business/story/0,3604,1566862,00.html), Guardian, September 10, 2005, discusses "missing trader fraud" and "carousel fraud". EU clampdown spawns new carousel fraud (http://business.guardian.co.uk/story/0,,2089860,00.html), Guardian, May 29, 2007, discusses "contra trading" in the EU and "flipping" in Canada.
License
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