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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Understanding VAT Fraud: Expert Insights and Legal Remedies

Author: Nicola Sharp  29 April 2014
4 min read

The European Union (EU) wants more cooperation between nations to combat VAT fraud. It is a reminder that such tax evasion is becoming more and more difficult to commit – at least if you want it to remain undetected.

In a move that may until now have been thought unlikely, the EU is offering the hand of friendship to Russia.

The issue of Europe versus Russia may have been one that has seen chaotic disturbances and upheaval in Ukraine already this year but the EU is keen to build bridges with the Putin-led state. It also wants to initiate a productive dialogue with Norway; another non-EU member.

This spirit of friendship is being offered for a far more practical reason than mere affection. The EU sees Russia and Norway as key to its attempts to further tackle VAT fraud. It believes that striking administrative cooperation agreements with the two nations will go some way to reducing the scope for VAT evasion and manipulation by organised crime groups around Europe.

The EU has asked its member states for a mandate to start negotiations with Norway and Russia. At the same time, it is holding preliminary talks with both countries. Perhaps more importantly, however, the EU is also holding similar discussions with the likes of Canada and China. The aim is to strengthen and extend the existing international agreements to prevent cross-border EU VAT fraud. In this way, the EU argues, it can reduce the potential for such fraud and, when it does happen, it can ensure the best possible opportunity to recover the VAT that is due.

This is not a drastic change of heart by the EU. It’s also not a sudden “light bulb moment’’ where EU officials suddenly became aware of the benefits of negotiating on this matter with countries that are not among its membership. The growth and wide geographical spread of telecoms and e-services have made it imperative that the EU acts to consider and combat the potential for VAT fraud in these sectors in countries not part of the EU – what are known as “third-country operators’’.

At present, member states help each other tackle VAT fraud by giving each other access to their databases and exchanging information on the activities of their taxpayers. EU member states exchange information on VAT fraud via the EU’s intelligence system Eurofisc. The EU is now looking to extend Eurofisc to its neighbours, major commercial organisations and countries currently regarded as leading the field in electronically-supplied services. In short, EU wants to cast its net further to catch the more far-flung practitioners of VAT fraud.

VAT Attack

Echoing this fact, EU taxation commissioner Algirdas Semeta explained that the supply chain has changed since VAT was introduced into the European Union.

He added: “Globalisation and e-commerce open up new windows of opportunity but also create new risks. Fraudsters play on cross-border differences and information gaps between countries.

“The EU needs to work hand in hand with its international partners if it is to successfully combat VAT fraud. That is what the European Commission is proposing today, with a request for negotiating mandates to formalise this operation.’’

Semeta’s comments reflect the EU’s awareness that changing times lead to changes in the nature of crime. VAT fraud in years gone by saw mobile phones as the import-export item of choice for those looking to make an illegal buck. The British government became wise to it and made changes; introducing the reverse charge for VAT payment on phones that made it far more difficult to use them for carousel fraud. More recently, carbon credits have been attractive to those wanting to abuse the VAT system for personal gain. Chains of bogus companies have been set up to perpetrate carbon credit fraud in exactly the same way as they were used when mobile phones were the popular carousel fraud item. As with phones, the British government has again made changes to the tax system – giving carbon credits a zero VAT rating - to reduce the scope for carousel fraud.

It is unlikely that VAT fraud will end with carbon credits. The VAT system offers potential for the person looking to commit fraud in various ways – hence the EU’s reaching out to Russia, Norway and other countries in an attempt to try and reduce it. At Rahman Ravelli, we have experience of representing clients involved in cases involving hundreds of millions of pounds of alleged VAT fraud and different commodities including carbon credits. For example, we have recently been involved in a number of cases involving fraud in relation to steel purchases. Steel, just like carbon credits and mobile phones, is a legitimate commodity.

The EU and the British government know that VAT fraud is a problem. The items imported and exported may change but the principles remain the same – and people still seem able to beat the system.  The EU’s latest attempts to combat VAT may come to something or nothing. But they should at least be taken as a warning that it intends to come down hard on anyone it suspects of VAT fraud. Such fraud is on the EU’s radar and that of its member states.

With this in mind, it almost goes without saying that anyone who does find themselves under investigation has to be able to back up with evidence any claims they make that they have only ever acted legitimately. This may necessitate bringing in a legal expert who is familiar with the law regarding tax fraud and experienced in dealing with the relevant authorities. With tax evasion prosecutions increasing in this country, it appears that HM Revenue and Customs is only too keen to follow the EU’s proactive approach to tackling VAT fraud.

It is true that the authorities do sometimes get it wrong. But this does not automatically mean an innocent person will walk free from court, if the case goes that far. It takes the right legal representation to spot the weak links in a prosecution case and identify exactly how the allegations can be best challenged. If the EU is looking for greater international cooperation in tackling VAT fraud, it stands to reason that it expects there to be more VAT fraud prosecutions. And for that reason alone it is becoming even more important that everyone has their VAT affairs in order.

Nicola Sharp C 09983

Nicola Sharp


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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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