VAT Fraud with Intra-community Trading and How to Prevent It

The EU system for levying VAT attracts more and more fraudsters, who abuse the system and leave EU Member States with massive tax losses. Inventive schemes are especially common in intra-community supplies of goods. Naturally the EU Member States actively try to monitor and combat VAT fraud, designing and prescribing more stringent rules for trading goods within the EU. Tax authorities have become more alert and initiate more investigations. But these stringent rules and investigations also affect companies that are operating in good faith and such companies can become involved in VAT fraud with severe adverse consequences, including harsh VAT audits that are costly, time consuming and may lead to liability for the ‘disappeared’ VAT.

VAT fraud is complicated and inventive in structure. In general there are two main types:

  • Missing Trader Intra-Community Fraud, of which carrousel fraud is an example. In such fraud there is a chain of transactions in which one or more companies effectively charges VAT to other chains but does not actually remit the VAT to the tax authorities. The other chain then asks for a reclaim of the VAT. The tax authorities grant such requests but never receive the VAT from the ‘bad’ supplier. The latter disappears after a while leaving the tax authorities empty handed.
  • Black market trading, where suppliers operate that are not known to the tax authorities and do not fulfill their obligations to charge and remit VAT. This type of fraud usually takes place in luxury and expensive goods for private use such as clothing, computers and mobile phones.
“Fraudsters in both situations often intentionally involve good faith companies in the transaction chain, giving it more substance and credibility and making it harder for the tax authorities to detect and prevent the fraud. It is crucial that companies know how to recognize VAT fraud and, more importantly, how to prevent becoming involved.”

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Companies operating in good faith may experience trouble such as liabilities and tax audits when involved in fraud. To detect and prevent such involvement, companies can take the following steps:

  • Detail all required information (e.g. VAT numbers, customer and delivery address) on invoices issued;
  • Check that all required information (e.g. VAT numbers, addresses) is mentioned on invoices received and, if information is omitted or incorrect, request a corrected invoice;
  • Verify the VAT numbers of new suppliers or new customers with the tax authorities or through VIES (VAT Information Exchange System) available at http://ec.europa.eu/taxation_customs/vies;
  • Periodically verify the VAT numbers of existing suppliers or customers with the tax authorities or through VIES available at http://ec.europa.eu/taxation_customs/vies;
  • Make sure that solid evidence of the transport of goods is administrated and available in case of VAT audit;
  • File VAT returns and listings for intra-community supplies and services on time and try to prevent later corrections to returns and listings;
  • Introduce a system of checks and balances within the company to monitor that all necessary actions are taken when trading in the EU and to detect any weaknesses in VAT compliance systems.

In some specific situations a company needs to pay special attention to ensure it does not get involved in VAT fraud. A company should be alert to:

  • Customers that want to purchase under the condition ‘ex works’ and with the 0% VAT rate for intra-community supplies. Always make sure that it is a regular and verified customer and make sure the person who picks up the goods signs a complete and correct statement as required;
  • Rapidly changing groups of suppliers or customers that have recently become active or that have recently changed management. Check new suppliers/customers with the Chamber of Commerce and confirm their VAT number with the local tax authorities;
  • Suppliers or customers indicating who you can sell your products to or from;
  • Suppliers offering goods below market value;
  • Suppliers approaching you to trade goods that are different from your regular branch.

This is a brief description of the necessity to prevent involvement in VAT fraud. The information of how to do it is not described in full as the best approach for each company depends on the nature of the individual company, the goods in which it trades and the market segment it operates in. This is nevertheless an indication of what a company needs to be aware of to avoid fraud and it is always better to be safe than sorry.

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Patrick Vettenburg

Loyens & Loeff
VAT, Customs and International Trade
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