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Missing Trader Intra-Community (MTIC) Fraud Explained

Author: Zulfi Meerza  6 June 2024
9 min read

Introduction

Missing trader intra-community (also known as MTIC fraud) is a practice that involves the theft of value added tax (VAT) from governments. It is an activity that costs authorities in a number of countries billions each year in tax losses.

This article explains what VAT fraud is, how MTIC fraud operates, the responses to it and how companies can reduce the risk of becoming involved with it.

What is VAT fraud?

VAT is a tax on goods and services. VAT fraud involves criminals making a profit by either avoiding the payment of VAT or by fraudulently claiming repayments of VAT from national authorities. 

This can be done in a number of ways. But MTIC fraud is the most common method used by those looking to illegally gain through abuse of the VAT system.

What is Missing Trader Intra-Community (MTIC) fraud?

MTIC fraud involves organised activities that are planned to exploit differences in how VAT is treated in different European Union (EU) Member States. The criminals create a structure of linked companies and individuals across these states. They then use this chain of companies to abuse the VAT systems in more than one country.

How does MTIC fraud work?

MTIC fraud involves abuse of the VAT system. This abuse takes advantage of legislation that allows trading across EU Member State borders to be VAT free. When the goods are imported, no VAT has to be paid on them. The VAT is only applied to the goods when they are sold in the Member State that they were exported to. Any VAT charged on sales should then be declared and paid to that Member State’s revenue authority.  

But in the simplest MTIC cases, the fraudsters sell the goods in that Member State, charge the VAT to buyers but do not then send that VAT payment to the Member State’s tax authorities. There are, however, different ways of carrying out MTIC fraud. One of the most common is carousel fraud.

What is VAT carousel fraud and how does it work?

Carousel fraud is a type of MTIC fraud, as it involves deception of the authorities regarding the payment or reclaiming of VAT. It is a more complex version of the “normal’’ MTIC fraud.

With carousel fraud, the goods and services that should be subject to VAT are bought and sold by a group of companies operating in a circle. This is why it is called carousel fraud – the goods go around and around, being sold between companies in that circle before arriving back at the original seller. The companies in that circle then claim repayment of VAT on those goods, even though none has ever been paid.

This arrangement is often made more complex in order to disguise the fraud from the authorities. There can often be more than ten companies involved in a carousel fraud and their trading with each other as part of this can be carried out in many Member States.

VAT Carousel Fraud Example

Below are some typical stages in a common carousel fraud scenario;

  1. Company A in Member State 1 sells goods (or services) to Company B in Member State 2. There is no VAT to be paid on this, as goods can cross from Member State to Member State without VAT being paid.
  2. Company B then sells the goods (or services) to Company C in Member State 2 who pays VAT on the goods (or services) provided. However, Company B does not declare or pay its VAT liability.
  3. Company B then disappears and therefore becomes a “missing trader’’. Company C then sells the goods (or services) to Company D, reclaiming the VAT charged to it by Company B and declaring the VAT it charges to Company D.
  4. Company D then sells the goods (or services) back to Company A in Member State 1. No VAT needs to be paid on this sale as the trade is from one Member State to another.
  5. Company D then asks for a refund of the VAT paid to Company C. The authorities in Member State 2 are then paying out a VAT “refund’’ on VAT that was never paid to them in the first place by any company.

The goods will now carousel through entities in other Member States until they are again acquired by a UK VAT-registered taxable person. At this stage, the above process begins again, normally with different companies but sometimes with one or more of the companies being the same.

The Evolution of MTIC Fraud

MTIC fraud has developed over the years as those looking to make illegal gains from it make changes to how they operate in order to maximise their profits.

The earliest forms of MTIC fraud tended to involve goods such as precious metals, mobile phones or portable electronic items. These were used by those looking to carry out MTIC fraud because they are small, low-weight and high-value items that could be transported in large numbers, meaning the fraudsters could make the maximum possible gain. 

Organised crime groups have, however, moved into other areas, including motor vehicles, wood, alcohol, tobacco, oil, gas and electricity, and even non-physical products such as software and data provision.

Their movement into areas such as energy and environmental markets has made their operations more complex, which can make investigations more challenging for the authorities. The fluctuations in such markets can also affect the gains that can be made by those carrying out MTIC fraud.

The Impact of MTIC Fraud

Some people may think MTIC fraud is a victimless financial crime because it affects only governments. But this view does not take into account the full effect of MTIC fraud.

It is a crime that deprives governments of money – either by not paying VAT when it should be paid or by falsely claiming that VAT should be paid back when none was ever paid in the first place.

By defrauding governments in this way, those carrying out MTIC fraud are keeping money that could otherwise have been used to pay for important public services such as health or education. 

It should also be remembered that the fraudsters may then use their illegal gains from MTIC fraud to fund other forms of crime, such as cigarette smuggling or drug trafficking. And the chains of companies that are set up to carry out carousel fraud often involve other (completely innocent) businesses.

It is these businesses that are often the only ones that can be traced by the authorities when such wrongdoing has been identified, as the bogus companies often disappear once the fraud has been completed. 

The secretive and complex nature of such crime makes it hard to put an exact figure on how much criminals are making through MTIC fraud. But most recent official estimates say it costs European Union countries about €11.5 billion a year.[1]

How is MTIC fraud identified? VAT Fraud Due Diligence for Businesses

Those carrying out MTIC fraud will put a lot of effort into hiding the real purpose of the trading that they appear to be involved in. As a result, it can be difficult for a genuine company to realise that another company that wants to do business with it is only doing so as part of an elaborate MTIC fraud.

But there are some “red flags’’ that law-abiding companies can look out for as signs of possible MTIC fraud.

These are:

  • The arrival of newly-established or recently-incorporated companies that have no financial or trading history.
  • People in companies that have little or no knowledge of the market they claim to be involved in or the products.
  • Organisations that make contact and offer an easy profit on deals that appear to be free of risk.
  • Repeat deals at the same price or even a lower price that produce a small or consistent profit.
  • Instructions to make payments to third parties or organisations based offshore.
  • Individuals that have a history of wholesale trading in high-value, low-volume goods such as computer parts and mobile phones.
  • Unsecured loans with unrealistic interest rates and / or terms.
  • Instructions to pay less than the full price (and often even less than the VAT invoiced) to the supplier.
  • Established companies that have recently been bought by people who have no experience in its business sector.
  • New companies managed by individuals with no prior knowledge of the product or the business sector, who then hire specialists from within that sector.
  • Entities trading from residential accommodation, premises on a short lease or serviced offices.

Businesses have to be aware of these red flags and alert to the possibility of them being present whenever a deal is discussed with or suggested by another company.

Carrying out a range of checks on a company can be of vital importance in making sure that any risks are identified and responded to. Such checks will vary, depending on the situation.

But they can include:

  • Obtaining copies of a company’s certificate of incorporation (the legal document relating to the company’s formation) and VAT registration certificate.
  • Checking the company’s VAT registration details with HMRC.
  • Asking for some form of written references from others in business who can vouch for the company being genuine.
  • Carrying out credit checks or other background checks on the company.
  • Insisting on personal contact with a senior figure in the company.
  • Visiting the address that has been given as the company’s premises.
  • Asking for all available information regarding the company’s banking and payment arrangements.
  • Examining all available paperwork, such as purchase orders, proforma invoices (bills that request payment before goods or services have actually been provided), and delivery notes.

Any investigation into suspected VAT fraud will involve HMRC (or whoever is conducting the investigation) looking to see if actions were taken to identify and prevent any risk. A company, therefore, has to be able to show it was carrying out all possible checks and responding in the right way to even the slightest suggestion of VAT fraud.

MTIC Fraud in the UK

The UK’s tax authority, HM Revenue and Customs (HMRC), has estimated that it suffered a loss of £400 million in tax last year from different kinds of complex VAT trading schemes.[2] But it will always be difficult to put an exact figure on the loss, due to the secretive and deliberately complicated way such fraud is carried out.

Some estimates from the UK government have put the total figure at between £1 billion and £1.5 billion for some years.[3]

What are the penalties for MTIC fraud in the UK?

The penalties in the UK for such activity can be severe. The deliberate evasion of VAT is an offence under section 72(1) of the Value Added Tax Act and the maximum penalty for offences tried in the Crown Court is seven years imprisonment and an unlimited fine. In a magistrates court, the maximum sentence is six months in jail or a fine up to £20,000. 

Prosecutions for carousel fraud often include the common law offence of cheating the revenue or conspiracy to cheat under S 1(1) of the Criminal Law Act 1977. HMRC also deals with dubious VAT behaviour through a civil evasion penalty regime. There is also the possibility that those involved in such activity could face a charge of fraudulent trading.

While the penalties for such offences can have a severe effect on a company’s ability to trade, they can also have an added impact. A company that is a known offender when it comes to VAT fraud will suffer damage to its reputation and its standing in the business sector it is in. This can make it very difficult to function effectively – regardless of whether it became involved in VAT fraud knowingly or unknowingly.

HMRC’s Approach to Combating MTIC/VAT Fraud

Under s68 Finance (No.2) Act 2017, which introduced new sections of s69C-E of the Value Added Tax Act 1994, a fixed penalty of 30% of the potential VAT lost was introduced for those participating in VAT fraud. 

This penalty applies to anyone who has entered into a transaction connected with fraudulent VAT evasion and who knew or should have known that fraud was involved. 

This means that HMRC can pursue companies that became innocently involved in VAT fraud – which may persuade companies to be more careful about the risks of this happening and more aware of the need to prevent it.

In Mobilx (in administration) v HMRC [2010] EWCA Civ 517, the Court of Appeal confirmed that the test is a strict one and that if an innocent trader had any way of knowing that a transaction may be fraudulent, then they should have known that it was fraudulent

MTIC Fraud in the EU

In February 2024, the European Public Prosecutor's Office (EPPO) – the organisation responsible for prosecuting crimes against the financial interests of the EU - published its annual report for 2023. This estimated that €11.5 billion had been lost to VAT fraud in that year.

EU Member States will, when necessary, work together and with EPPO to hold to account those responsible for VAT fraud.

As an example, November 2022, saw a major VAT fraud scheme worth an estimated €2.2 billion uncovered by EPPO. It was supported in this by the EU law enforcement agency Europol (including assistance from Europol’s European Financial and Economic Crime Centre) and by law enforcement agencies from 14 EU Member States. 

How to Respond to Allegations of MTIC Fraud

Any allegation of MTIC fraud needs to be responded to in the most appropriate way as swiftly as possible. If HMRC (or any other party) makes an allegation that a company has been involved in MTIC fraud, it will clearly have grounds for thinking it is right to do so. 

The company that the allegation is made against then has the challenge of disproving it. If this is not possible because it was involved in such a fraud, then the company needs to be able to convince investigators that it had no knowledge that the trading it was doing was part of an illegal scheme. At the very least, the company will have to show that it had carried out all possible checks on its trading partners.

But if investigators find that a company did not make any checks, that its checks were half-hearted or inadequate or that it ignored warning signs of MTIC fraud, the company will find itself in a difficult position. 

Ideally, every company should have procedures in place to identify the risk of MTIC fraud and prevent it happening. At Rahman Ravelli, we are experienced in helping companies assess their risk and devise and introduce workplace practices to remove it.

When it comes to investigations, we have in-depth experience and expertise in dealing with HMRC – and all the other agencies that may investigate a company suspected of financial wrongdoing.

Our lawyers are well-versed in challenging allegations and making representations to the authorities on behalf of clients. As experts in VAT (and other forms of tax), Rahman Ravelli is well-equipped to mount a robust, bespoke defence on behalf of any company faced with allegations of MTIC fraud.

Source

  1. https://www.eppo.europa.eu/en/documents/2023-numbers
  2. https://www.legendfinancial.co.uk/vat/vat-fraud-what-it-is-what-the-penalties-are-and-how-to-report-it/
  3. https://committees.parliament.uk/work/4066/tackling-online-vat-fraud-and-error-inquiry/news/
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Zulfi Meerza

Senior Associate Solicitor

zulfi.meerza@rahmanravelli.co.uk
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Zulfi’s in-depth expertise in business crime investigations and serious regulatory matters makes him a logical choice to advise and represent corporates, board members, senior business figures and high net worth individuals throughout the life of a case.

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