Fears of surge in VAT fraud

THIS week's VAT hike could lead to a surge in fraud in the UK energy industry which would cost unwitting firms millions, legal experts have warned.

Revenue and customs officials warned the industry as long ago as July that they believe criminal gangs are looking at gas and power trading as a method to commit VAT fraud on a grand scale. The new year rise to 20 per cent will heighten that risk.

Jason Collins, a parter with Scottish law firm McGrigors, said: "The worry is that the impending higher VAT rates make the UK gas and power market a more attractive venue for fraud than before. Businesses in that sector must be extra vigilant to try to avoid dealing with fraudsters."

Over the years, so-called "missing trader intra-community" (MTIC) fraud has cost the UK government billions in lost tax revenues. However, the fraud has been on the wane, partly because much of the criminal activity has moved to continental Europe to take advantage of the even higher tax rates there.

"Much of the VAT fraud that was being engineered by criminal gangs had shifted to continental Europe where VAT rates are higher," said Collins.

"Their reasoning was that if you are going to break the law on such a huge scale you may as well take that risk for the largest amount of money possible. The higher the VAT you can charge the more money you can steal.

"If more MTIC fraud does shift to the UK then the Treasury could be facing a serious shortfall in revenues when it can least afford it. HM Revenue & Customs (HMRC] have tightened up against missing trader fraud but they are always in an arms race with the fraudsters," he added.

With the increase in VAT from 17.5 per cent to 20 per cent the UK will have a higher sales tax rate than many European countries, such as Germany and the Netherlands at 19 per cent and France at 19.5 per cent.

MTIC is where a business buys goods VAT-free from another country and sells them domestically, charging VAT without paying the tax over to HMRC.

Collins warns one result of MTIC fraud is that innocent businesses inadvertently caught up in the fraud can face VAT bills running into the tens of millions.

HMRC will use powers to recover the tax from those parties in a supply chain if it concludes that the business could have discovered, through extensive due diligence or reasonable inquiry, that they were trading in the same supply chain as a fraudster. The fraud has been so prevalent in certain areas - including the carbon emissions allowances market - that HMRC has been forced to change the VAT rules so that it is no longer possible to acquire goods VAT-free.

"Other than a wave of carbon trading related frauds in 2008-9, MTIC fraud had reached more manageable levels so it is a worry that the Serious Organised Crime Agency have identified the gas and power markets as a new target for this fraud. Businesses in this sector need to take extra care," said Collins.

"But it is not just down to those businesses to guard against VAT fraud. It can be exceptionally difficult for a business to detect the fraud, and HRMC should stand ready to change the VAT rules in this industry if the fraud starts to get out of hand."