Do you understand what the indicators of Missing Trader, MTIC and Carousel Fraud are?
If you are involved in the Excise industry you may at sometime have received a letter from HMRC which refers to your involvement with a Missing Trader or being in a supply chain in which there is MTIC fraud. This may also extend to carousel fraud.
A brief overview of Missing Trader Intra-Community Fraud, often referred to as “MTIC” fraud is covered below as there are several different forms that MTIC fraud can take.
Within your due diligence, companies should be considering the risk presented by the supply chain within which they are operating. Whilst the name and details of your supplier’s own supplier are unlikely to be provided for competition reasons, questions about what level of the supply chain they are at (are they a manufacturer or wholesaler etc), what sort of trades/movements the company looks to undertake and where suppliers are located etc, are good indicators from which to assess the level of risk that is present.
Asking all the questions in the world will not help if you do not understand what risks you are looking for and how the fraud takes place. As such this article tries to set out a few of the possible types of MTIC fraud that can occur.
- In its simplest form MTIC is known as an acquisition fraud. A trader imports goods from another Member State. No VAT is payable on the import. The trader then sells on those goods to a domestic buyer and charges VAT. He dishonestly fails to account for the VAT to HMRC and disappears. The importer is labelled a “missing trader” or “defaulter”.
- The next level of sophistication involves both an import and an export. A trader once again imports goods from another Member State. No VAT is payable on the import. The trader then sells on those goods to a domestic buyer and charges VAT. He dishonestly fails to account for the VAT to HMRC and disappears. The domestic buyer sells on to an exporter at a price which includes VAT. The exporter exports the goods to another Member State. The export is zero-rated. So the exporter is, in theory, entitled to deduct the VAT that he paid from what would otherwise be his liability to account to HMRC for VAT on his turnover. If he has no output tax to offset against his entitlement to deduct, he is, in theory, entitled to a payment from HMRC. Thus HMRC directly parts with money.
- Sometimes the exported goods are re-imported and the process begins again. In this variant the fraud is known as a carousel fraud. There may be many intermediaries between the original importer and the ultimate exporter. These intermediaries are known as “buffers”. The ultimate exporter is labelled a “broker”. A chain of transactions in which one or more of the transactions is dishonest has conveniently been labelled a “dirty chain”. Where HMRC investigate and find a dirty chain they refuse to repay the amount reclaimed by the ultimate exporter.
This is why it is important to understand about the supply chain and not just your supplier when undertaking due diligence. Many companies are often confused as to why they may suddenly become a subject of interest to HMRC but in these situations, it maybe that the company has inadvertently become involved in a dirty chain.
This is why HMRC will ask how and when you were introduced to your supplier, what checks you did as part of your due diligence and how the deal was commercially viable.
- In order to disguise the existence of a dirty chain, fraudsters have become more sophisticated. They have conducted what HMRC call “contra-trading”. The trader who would have been the exporter or broker at the end of a dirty chain, with a claim to repayment of input tax, himself imports goods (which may be different kinds of goods) from another Member State. Because this is an import he acquires the goods without having to pay VAT. This is the contra-trade. He sells on the newly acquired goods, charging VAT but this output tax is offset against his input tax, resulting in no payment (or only a small payment) to HMRC. The buyer of the newly acquired goods exports them and reclaims his own input tax from HMRC. Again there may be intermediaries or buffers between the contra-trader and the ultimate exporter. The fraudsters’ hope is that if HMRC investigate the chain of transactions culminating in the export, they will find that all VAT has been properly accounted for. This chain of transactions has conveniently been called the “clean chain”. Thus the theory is that an investigation of the clean chain will not find out about the dirty chain, with the result that HMRC will pay the reclaim of VAT on the export of the goods which have progressed through the clean chain.
Many of these risks can be identified through a good level of due diligence but if the correct questions are not being asked the risks will not be identified. Altion Law can assist with any concerns on Missing Trader fraud or assist with strengthening your existing due diligence and risk assessment procedures.