VAT Fraud & Control of Refunds and Credits A Strategic Approach to Tackling VAT Losses Andy Leggett HM Customs & Excise United Kingdom

Scope of presentation The Strategic Approach in principle The Strategic Approach in principle The UK Strategy to tackle VAT losses across the compliance spectrum The UK Strategy to tackle VAT losses across the compliance spectrum Tackling Missing Trader Fraud, including carousel fraud – The single biggest threat to the UK VAT system Tackling Missing Trader Fraud, including carousel fraud – The single biggest threat to the UK VAT system

The Strategic Approach Six Key Steps Understand the size and dynamics of the problem Understand the size and dynamics of the problem Understand the nature and extent of the problem Understand the nature and extent of the problem Identify resources and tactics needed to tackle losses Identify resources and tactics needed to tackle losses Quantify realistic outcomes (impact) Quantify realistic outcomes (impact) Agree and implement tactical plans with clear accountabilities Agree and implement tactical plans with clear accountabilities Continuously monitor, direct and re-direct operational/policy and tactics Continuously monitor, direct and re-direct operational/policy and tactics

Benefits of a Strategic Approach Focus on outcomes not outputs Focus on outcomes not outputs Prioritisation, co-ordination and targeting of activity and resources Prioritisation, co-ordination and targeting of activity and resources Clarity for staff, what the goal is and what is expected of them Clarity for staff, what the goal is and what is expected of them If published, can send a deterrent message to potential fraudsters If published, can send a deterrent message to potential fraudsters Demonstrate proportionality of actions Demonstrate proportionality of actions Provides a rationale for making tough or presentationally difficult decisions Provides a rationale for making tough or presentationally difficult decisions Knowledge of whether tax losses are rising or falling Knowledge of whether tax losses are rising or falling

Downsides to the Strategic Approach Estimating Tax Gaps / measuring outcomes is difficult Estimating Tax Gaps / measuring outcomes is difficult Presentational issues relating to the size of losses Presentational issues relating to the size of losses –How did losses get so high? –What are you doing about it? –Why have you not done anything about it before? Delay in outcome data and visible impact Delay in outcome data and visible impact No direct link between operational outputs and strategic outcomes No direct link between operational outputs and strategic outcomes Accountability for success or failure of the Strategy Accountability for success or failure of the Strategy

Estimating VAT losses Two separate but complementary approaches: Two separate but complementary approaches: –top-down - difference between theoretical amount of VAT that should be due and actual VAT receipts = “VAT Gap” –bottom-up – uses operational and intelligence data to corroborate top-down approach and attribute losses to specific problem areas.

Top-down (VAT Gap) estimate Involves… assessing the total amount of expenditure in the economy that is theoretically liable for VAT; assessing the total amount of expenditure in the economy that is theoretically liable for VAT; estimating the tax liability on that expenditure; estimating the tax liability on that expenditure; deducting actual VAT receipts; and deducting actual VAT receipts; and assuming that the residual element - the gap - is the total VAT loss due to any cause including error, non- compliance, avoidance and fraud. assuming that the residual element - the gap - is the total VAT loss due to any cause including error, non- compliance, avoidance and fraud.

Top Down VAT Gap

UK VAT Strategy Launched April 2003 to reverse the trend of an increasing VAT Gap Launched April 2003 to reverse the trend of an increasing VAT Gap Creating an environment that fosters voluntary compliance and deals robustly with those that choose not to comply Creating an environment that fosters voluntary compliance and deals robustly with those that choose not to comply Creating an environment in which VAT fraud and avoidance become less economically viable Creating an environment in which VAT fraud and avoidance become less economically viable Target: to reduce VAT Gap from 15.8% to no more than 12% by March 2006 Target: to reduce VAT Gap from 15.8% to no more than 12% by March 2006

Compliance Continuum Non Compliance Voluntary Compliance New Business Law Enforcement Help for business Assure or Educate? RISK Analysis Triers Compliant Deliberate Chancers Evasion Avoidance Failures Enforcement/ Disruption / Assurance / Advice / Education/ Marketing

‘Bottom-up’ estimates Top-down measure is comprehensive but gives no indication of the nature of the loss Top-down measure is comprehensive but gives no indication of the nature of the loss Use operational and intelligence data to corroborate the top-down approach, and helps attribute losses to particular problem areas Use operational and intelligence data to corroborate the top-down approach, and helps attribute losses to particular problem areas

Bottom Up Estimates Missing Trader Fraud Missing Trader Fraud Avoidance Avoidance Failure to Register for VAT Failure to Register for VAT General non- Compliance General non- Compliance £ £1.73 bn £2.5 - £3.0 bn £0.4 - £0.5bn £2.5 - £4.0 bn

Nature of VAT losses errors on VAT returns; errors on VAT returns; failing to submit VAT returns on time; failing to submit VAT returns on time; Late or non- payments; Late or non- payments; deliberately under-reporting of liability on VAT return; deliberately under-reporting of liability on VAT return; abusive avoidance schemes to reduce or avoid liability; abusive avoidance schemes to reduce or avoid liability; operating a business in the shadow economy; operating a business in the shadow economy; criminal attacks against the VAT system. criminal attacks against the VAT system.

Tackling the Spectrum of Losses 1000 extra staff 1000 extra staff Encourage voluntary compliance Encourage voluntary compliance –Outreach programme Crack down on deliberate non-compliance Crack down on deliberate non-compliance –Targeting risk –Strengthened Debt Management –Target Shadow economy Tackling avoidance Tackling avoidance –Litigation –Legislation

VAT Missing Trader Fraud (‘A’) EU Supplier Intra-EU supply £1,000,000 – “VAT” Nil £1,000,000 – “VAT” Nil (‘B’) UK Defaulting Trader (‘C’) UK Buffer Trader UK supply £900,000 + “VAT” (‘D’) UK Buffer Trader UK supply £ 920,000 + “VAT” (‘E’) UK Broker UK supply £950,000 + “VAT” “VAT” not paid to HM Customs & Excise = tax loss of £157,500 Intra-EU supply £970,000 – “VAT” Nil. Reclaims from HM Customs & Excise “VAT” paid on UK supply - £166,250

VAT Missing Trader fraud – scale and nature 1999 VAT loss £1.2-£2.3bn and growing at £0.45-£0.75bn VAT per year VAT loss £1.2-£2.3bn and growing at £0.45-£0.75bn VAT per year. ‘The sky’s the limit’ ‘The sky’s the limit’ Organised attack on the VAT system by criminal gangs Organised attack on the VAT system by criminal gangs Main sectors affected – mobile phones and computer components Main sectors affected – mobile phones and computer components Creating unfair competition for legitimate businesses Creating unfair competition for legitimate businesses

VAT Missing Trader fraud – strategic response Nationally co-ordinated strategy launched in September 2000 Nationally co-ordinated strategy launched in September 2000 Aim – to stop the fraud before it can begin Aim – to stop the fraud before it can begin Where that does not succeed, identify fraud at the earliest point and stop it Where that does not succeed, identify fraud at the earliest point and stop it Top VAT fraud priority – therefore, sharper priority focus Top VAT fraud priority – therefore, sharper priority focus Enabled the re-deployment of existing resources Enabled the re-deployment of existing resources

VAT Missing Trader fraud – strategic response Tighter controls at all points in ‘supply chain’ Tighter controls at all points in ‘supply chain’ Development of new regulatory and enforcement tools Development of new regulatory and enforcement tools New legislation – Joint and several liability New legislation – Joint and several liability Working with legitimate business in affected sectors Working with legitimate business in affected sectors Publicity Publicity Working with other EU states Working with other EU states Sharply focused and targeted criminal investigations Sharply focused and targeted criminal investigations

VAT Missing Trader fraud – progress Rapid growth of fraud now halted Rapid growth of fraud now halted Fraud in decline for the first time since 1999 Fraud in decline for the first time since 1999 VAT losses fallen to range £1.06bn-£1.73bn by March 2004 – 25% fall in the year VAT losses fallen to range £1.06bn-£1.73bn by March 2004 – 25% fall in the year Losses one third lower than peak levels – annual saving of up to £800m VAT a year Losses one third lower than peak levels – annual saving of up to £800m VAT a year

VAT Missing Trader Fraud – Current State of Play Operational evidence that trade has slowed but stabilised Operational evidence that trade has slowed but stabilised Fraudsters changing their tactics Fraudsters changing their tactics Greater use of non-EU supply chains Greater use of non-EU supply chains Mobile phones and computer parts still the main commodities Mobile phones and computer parts still the main commodities Refresh the Strategy to meet new challenges Refresh the Strategy to meet new challenges

Impact of the VAT Missing Trader Fraud Strategy

Does the Strategic Approach work? Baseline 2003 – VAT Gap 15.8% Baseline 2003 – VAT Gap 15.8% Target to reduce the VAT Gap to 12% by 2006 Target to reduce the VAT Gap to 12% by 2006 At April 2004 the VAT gap was 12.9% At April 2004 the VAT gap was 12.9% Similar successes in other taxes Similar successes in other taxes –Tobacco –Oils