VAT Carousel Fraud is the common name for “Missing Trader Intra-Community” VAT Fraud. In summary, this fraud arises from the fact that sales of goods between EU member states are effectively VAT free since the introduction of the European single market on 1 January 1993.

The basis of the fraud can be fairly simple, as explained in the example below:

  • a mobile phone is imported into the UK VAT free;
  • the phone is subsequently sold by numerous intermediaries within the UK; and
  • the phone is exported, again VAT free.

Simplistically, an intermediary goes missing without paying the requisite VAT to HMRC. When the exporter subsequently reclaims the full value of its input VAT, it is effectively seeking to recover funds that HMRC never received. Essentially, it is this money which funds the fraud further back in the sales process.

This process is then repeated as the exported phone is imported again and goes round the loop again, as if on a carousel, hence the name. There have been reported cases of the same goods being circulated up to 35 times.

The simple principle set above is often not so straightforward in practise, however, as there are often dummy companies set up, the sole purpose for which is to create distance between the importer and the exporter, “a buffer”. Alternatively, the identity of a company that has a genuine VAT registration is hijacked, and false documents are created, whilst the genuine company is ignorant of the transactions. Quite often there is a central figure, or “ringmaster” to see that the circle of transactions is completed and that the goods are re-imported in order for the carousel to continue.

It is the increasing complexity of the methods used to hide the identity of the fraudulent trader, coupled with the increase in the size of market, that have created the issues reported in the headlines. The attempts by HMRC to withhold VAT repayments on various grounds from a significant number of traders within this sector, most famously in the Bond House case, regardless of their legal merits, effectively penalises all such traders in this sector, in its efforts to identify and prosecute only the fraudulent ones.