VAT Fraud & Control of Refunds and Credits A Strategic Approach to Tackling VAT Losses

1. VAT Fraud & Control of Refunds and CreditsA Strategic Approach to Tackling VAT Losses Andy Leggett HM Customs & Excise United Kingdom

2. Scope of presentation • The Strategic Approach in principle • 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

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

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

5. Downsides to the Strategic Approach • Estimating Tax Gaps / measuring outcomes is difficult • 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 • No direct link between operational outputs and strategic outcomes • Accountability for success or failure of the Strategy

6. Estimating VAT losses • 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.

7. Top-down (VAT Gap) estimate Involves… • assessing the total amount of expenditure in the economy that is theoretically liable for VAT; • estimating the tax liability on that expenditure; • 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.

8. Top Down VAT Gap

9. UK VAT Strategy • 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 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

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

11. ‘Bottom-up’ estimates • 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

12. Missing Trader Fraud Avoidance Failure to Register for VAT General non-Compliance £1.06 - £1.73 bn £2.5 - £3.0 bn £0.4 - £0.5bn £2.5 - £4.0 bn Bottom Up Estimates

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

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

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

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

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

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

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

20. Impact of the VAT Missing Trader Fraud Strategy

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