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. Compliance Continuum

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. Bottom Up Estimates 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

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. VAT Missing Trader Fraud

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 � progress 2000-2003 Rapid growth of fraud now halted 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 Losses one third lower than peak levels � annual saving of up to �800m VAT a year

20. 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

21. Impact of the VAT Missing Trader Fraud Strategy

22. 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