VAT Fraud & Control of Refunds VAT Fraud & Control of Refunds and Creditsand Credits

A Strategic Approach to Tackling A Strategic Approach to Tackling VAT LossesVAT Losses

Andy LeggettAndy Leggett

HM Customs & ExciseHM Customs & Excise

United KingdomUnited Kingdom

Scope of presentationScope of presentation The Strategic Approach in principleThe Strategic Approach in principle

The UK Strategy to tackle VAT losses The UK Strategy to tackle VAT losses across the compliance spectrumacross the compliance spectrum

Tackling Missing Trader Fraud, including Tackling Missing Trader Fraud, including carousel fraud – The single biggest threat to carousel fraud – The single biggest threat to the UK VAT systemthe UK VAT system

The Strategic Approach The Strategic Approach Six Key StepsSix Key Steps

Understand the size and dynamics of the problemUnderstand the size and dynamics of the problem Understand the nature and extent of the problemUnderstand the nature and extent of the problem Identify resources and tactics needed to tackle Identify resources and tactics needed to tackle

losseslosses Quantify realistic outcomes (impact)Quantify realistic outcomes (impact) Agree and implement tactical plans with clear Agree and implement tactical plans with clear

accountabilitiesaccountabilities Continuously monitor, direct and re-direct Continuously monitor, direct and re-direct

operational/policy and tacticsoperational/policy and tactics

Benefits of a Strategic ApproachBenefits of a Strategic Approach

Focus on outcomes not outputsFocus on outcomes not outputs Prioritisation, co-ordination and targeting of activity Prioritisation, co-ordination and targeting of activity

and resourcesand resources Clarity for staff, what the goal is and what is Clarity for staff, what the goal is and what is

expected of themexpected of them If published, can send a deterrent message to If published, can send a deterrent message to

potential fraudsters potential fraudsters Demonstrate proportionality of actionsDemonstrate proportionality of actions Provides a rationale for making tough or Provides a rationale for making tough or

presentationally difficult decisionspresentationally difficult decisions Knowledge of whether tax losses are rising or fallingKnowledge of whether tax losses are rising or falling

Downsides to the Strategic Downsides to the Strategic ApproachApproach

Estimating Tax Gaps / measuring outcomes is Estimating Tax Gaps / measuring outcomes is difficultdifficult

Presentational issues relating to the size of lossesPresentational issues relating to the size of losses– How did losses get so high?How did losses get so high?– What are you doing about it?What are you doing about it?– Why have you not done anything about it before?Why have you not done anything about it before?

Delay in outcome data and visible impactDelay in outcome data and visible impact No direct link between operational outputs and No direct link between operational outputs and

strategic outcomesstrategic outcomes Accountability for success or failure of the StrategyAccountability for success or failure of the Strategy

Estimating VAT lossesEstimating VAT losses Two separate but complementary approaches:Two separate but complementary approaches:

– top-downtop-down - difference between theoretical amount - difference between theoretical amount of VAT that should be due and actual VAT receipts of VAT that should be due and actual VAT receipts = “VAT Gap”= “VAT Gap”

– bottom-upbottom-up – uses operational and intelligence data – uses operational and intelligence data to corroborate top-down approach and attribute to corroborate top-down approach and attribute losses to specific problem areas.losses to specific problem areas.

Top-down (VAT Gap) estimateTop-down (VAT Gap) estimateInvolves…Involves… assessing the total amount of expenditure in the assessing the total amount of expenditure in the

economy that is theoretically liable for VAT;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; anddeducting actual VAT receipts; and assuming that the residual element - the assuming that the residual element - the gapgap - is the - is the

total VAT loss due to any cause including error, non-total VAT loss due to any cause including error, non-compliance, avoidance and fraud.compliance, avoidance and fraud.

Top Down VAT GapTop Down VAT Gap

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04

VA

T G

ap (

£bn

)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

VA

T G

ap (

%)

UK VAT StrategyUK VAT Strategy Launched April 2003 to reverse the trend of an Launched April 2003 to reverse the trend of an

increasing VAT Gap increasing VAT Gap Creating an environment that fosters voluntary Creating an environment that fosters voluntary

compliance and deals robustly with those that compliance and deals robustly with those that choose not to complychoose not to comply

Creating an environment in which VAT fraud and Creating an environment in which VAT fraud and avoidance become less economically viableavoidance become less economically viable

Target: to reduce VAT Gap from 15.8% to no Target: to reduce VAT Gap from 15.8% to no more than 12% by March 2006more than 12% by March 2006

Compliance ContinuumCompliance 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’ estimatesBottom-up’ estimates Top-down measure is comprehensive but Top-down measure is comprehensive but

gives no indication of the nature of the gives no indication of the nature of the lossloss

Use operational and intelligence data to Use operational and intelligence data to corroborate the top-down approach, and corroborate the top-down approach, and helps attribute losses to particular helps attribute losses to particular problem areasproblem areas

Bottom Up EstimatesBottom Up Estimates

Missing Trader FraudMissing Trader Fraud

AvoidanceAvoidance

Failure to Register for Failure to Register for VATVAT

General non-General non-Compliance Compliance

£1.06 - £1.73 bn£1.06 - £1.73 bn

£2.5 - £3.0 bn£2.5 - £3.0 bn

£0.4 - £0.5bn£0.4 - £0.5bn

£2.5 - £4.0 bn£2.5 - £4.0 bn

Nature of VAT lossesNature 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 deliberately under-reporting of liability on

VAT return;VAT return; abusive avoidance schemes to reduce or avoid abusive avoidance schemes to reduce or avoid

liability;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 LossesTackling the Spectrum of Losses 1000 extra staff 1000 extra staff Encourage voluntary complianceEncourage voluntary compliance

– Outreach programme Outreach programme Crack down on deliberate non-complianceCrack down on deliberate non-compliance

– Targeting risk Targeting risk – Strengthened Debt ManagementStrengthened Debt Management– Target Shadow economyTarget Shadow economy

Tackling avoidanceTackling avoidance– LitigationLitigation– LegislationLegislation

VAT Missing Trader FraudVAT Missing Trader Fraud

(‘A’)EU

Supplier

Intra-EU supplyIntra-EU supply £1,000,000 – “VAT” Nil£1,000,000 – “VAT” Nil

(‘B’)UK Defaulting

Trader

(‘C’)UK Buffer

Trader

UK supplyUK supply£900,000 + “VAT”£900,000 + “VAT”

(‘D’)UK Buffer

Trader

UK supplyUK supply£ 920,000 + “VAT”£ 920,000 + “VAT”

(‘E’)UK Broker

UK supplyUK supply£950,000 + “VAT”£950,000 + “VAT”

““VAT” not paid to HM VAT” not paid to HM Customs & Excise =Customs & Excise =tax loss of £157,500tax loss of £157,500

Intra-EU supply £970,000 – Intra-EU supply £970,000 – “VAT” Nil. Reclaims from HM “VAT” Nil. Reclaims from HM Customs & Excise “VAT” paid Customs & Excise “VAT” paid on UK supply - £166,250on UK supply - £166,250

VAT Missing Trader fraud – VAT Missing Trader fraud – scale and naturescale and nature

1999 VAT loss £1.2-£2.3bn and growing at 1999 VAT loss £1.2-£2.3bn and growing at £0.45-£0.75bn VAT per year. £0.45-£0.75bn VAT per year.

‘‘The sky’s the limit’The sky’s the limit’ Organised attack on the VAT system by Organised attack on the VAT system by

criminal gangscriminal gangs Main sectors affected – mobile phones and Main sectors affected – mobile phones and

computer componentscomputer components Creating unfair competition for legitimate Creating unfair competition for legitimate

businessesbusinesses

VAT Missing Trader fraud – VAT Missing Trader fraud – strategic responsestrategic response

Nationally co-ordinated strategy launched Nationally co-ordinated strategy launched in September 2000in 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 Where that does not succeed, identify fraud

at the earliest point and stop itat the earliest point and stop it Top VAT fraud priority – therefore, sharper Top VAT fraud priority – therefore, sharper

priority focuspriority focus Enabled the re-deployment of existing Enabled the re-deployment of existing

resources resources

VAT Missing Trader fraud – VAT Missing Trader fraud – strategic responsestrategic response

Tighter controls at all points in ‘supply chain’Tighter controls at all points in ‘supply chain’ Development of new regulatory and enforcement Development of new regulatory and enforcement

toolstools New legislation – Joint and several liabilityNew legislation – Joint and several liability Working with legitimate business in affected Working with legitimate business in affected

sectorssectors PublicityPublicity Working with other EU statesWorking with other EU states Sharply focused and targeted criminal Sharply focused and targeted criminal

investigationsinvestigations

VAT Missing Trader Fraud – VAT Missing Trader Fraud – Current State of PlayCurrent State of Play

Operational evidence that trade has slowed Operational evidence that trade has slowed but stabilisedbut stabilised

Fraudsters changing their tacticsFraudsters changing their tactics Greater use of non-EU supply chainsGreater use of non-EU supply chains Mobile phones and computer parts still the Mobile phones and computer parts still the

main commoditiesmain commodities Refresh the Strategy to meet new challengesRefresh the Strategy to meet new challenges

Impact of the VAT Missing Impact of the VAT Missing Trader Fraud Strategy Trader Fraud Strategy

£0.50

£1.00

£1.50

£2.00

£2.50

£3.00

£3.50

£4.00

£4.50

£5.00

£5.50

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Year

£b

illio

n

Projected loss w ithout strategy £bn

Outturn £bn

Does the Strategic Approach Does the Strategic Approach work?work?

Baseline 2003 – VAT Gap 15.8%Baseline 2003 – VAT Gap 15.8% Target to reduce the VAT Gap to 12% by Target to reduce the VAT Gap to 12% by

20062006 At April 2004 the VAT gap was 12.9%At April 2004 the VAT gap was 12.9% Similar successes in other taxesSimilar successes in other taxes

– TobaccoTobacco– OilsOils

Chart 1: Market share of smuggled cigarettes (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Smuggling Estimate

Projected market share if no action taken

Target

GB illicit market for DERV - with and without the strategy

0

500

1000

1500

2000

2500

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

£m

Baseline

Real outcome

Real outcome to 2005/6

Without strategy