In the past, legislative reform has focussed on changing the VAT rules in response to fraudsters’ activity. For example, the UK changed the VAT accounting rules when selling mobile phones when carousel fraud was detected in the sector. The launch of the Transaction Network Analysis (TNA) tool earlier this month marks a change in approach which will boost governments’ ability to detect fraud using data collected by all EU Member States’ tax authorities.
It’s probably useful to start by defining our terms here. In practice, carousel fraud is often committed by sophisticated criminal organisations using highly complex, international supply chains. However, the principle is very simple; a criminal applies to register for VAT in one EU Member State then purchases goods or services from a supplier elsewhere in the EU (this means that no VAT is payable to the supplier). At the same time, the criminal then arranges for the sale of these goods or services to a (innocent) third party which is subject to local VAT. The third party pays the VAT due to the criminal. However, the VAT collected by the criminal is never paid to the tax authority. The carousel is formed as the same goods may then be sold back to the original supplier before being resold to the criminal.
To stamp out carousel fraud, individual Member States’ have sought to change their local VAT system so that goods or services typically used by these criminals are no longer subject to VAT in the hands of the supplier; instead the customer accounts for the VAT. However, fraudsters quickly respond to these changes and move to new parts of the economy.
The TNA tool has been developed to give the EU’s network of anti-fraud experts (Eurofisc) more information in their efforts to combat carousel fraud. With the introduction of the TNA tool, Eurofisc will have access to EU-wide tax data, criminal records, information held by Europol as well as the European Anti-Fraud Office. It is intended to increase the effectiveness and efficiency of participating countries’ cross-border investigations.
While the final terms of the UK’s departure from the EU remain unclear, it seems likely that at some point the UK will no longer participate in Europol, Eurofisc and will not have access to the TNA tool. Therefore, it is critical that the UK government and HMRC continues to reform the UK’s VAT system to respond to criminals’ abuse of the system and invests in technology to detect fraudulent activity. While Making Tax Digital will in theory give HMRC more immediate and efficient access to transaction information, it remains to be seen whether this will be an effective tool in the fight against tax fraud.