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‘MTIC’ Fraud – What can advisers do to help identify it in a business?

‘MTIC’ Fraud – What can advisers do to help identify it in a business?

Missing Trader Intra-Community (‘MTIC’) fraud, or Carousel fraud as it is also known, is costing the Government between £1.2 and £1.9 billion per year.  HMRC have pursued an aggressive strategy in combating this fraud, but this has been largely unsuccessful, and has alienated many businesses and VAT professionals.  

 

In many ways, the Bond House victory at the ECJ has turned out to be the best thing that could have happened for both the mobile phone industry and HMRC, as it has prompted new strategies in combating MTIC fraud.  To recap on how this fraud works, firstly, you have a UK VAT registered company that purchases mobile phones or computer chips from another EU country.  They are not charged VAT, and are expected to account for acquisition tax when they purchase the goods.  However, what usually happens is that the business (typically a start-up) suddenly generates turnover worth many, sometimes hundreds, of millions of pounds in the first quarter, selling the ‘VAT free’ acquisitions to UK companies and charging them VAT.  The company then disappears before it sends in its VAT return, and never pays the output VAT over.  The goods continue to move through a chain of transactions and eventually are exported from the UK, and end up where they started, ready to go round again.  It is not uncommon to find the same goods going round and round five or six times in just a few months.

 

Since the Bond House ECJ case, HMRC have acted swiftly by bringing forward new legislation in the Budget, and applying for a derogation from the EU Commission in order to effectively combat MTIC fraud.

 

The most important measure will be the derogation from the EC 6th Directive that passes the liability for accounting for output tax from the supplier to the customer in transactions concerning “specified goods”.  This effectively introduces a ‘reverse charge’ similar to that successfully brought in to combat fraud in the gold sector.  This measure will remove VAT from the transaction chain, so there will be no VAT paid over that a missing trader can then run off with.  Clearly, the sooner this measure is introduced, the better.

 

A second measure clarifies HMRC’s powers to mark goods. This will mainly affect freight forwarders, and should allow HMRC to track goods within a fraudulent transaction chain.  A third measure gives HMRC increased powers to make businesses maintain and retain records.  This will allow HMRC to better track the movement of goods within a chain of transactions, and identify business trading within those chains.  There will be a limited right of appeal in this area, but this has caused some disquiet in professional circles, where it is felt that the right of appeal granted shifts the balance in favour of HMRC to the detriment of the business.

 

These new measures come on top of the ‘joint and several liability’ legislation, and the power to require a security, both of which are now being used more actively. 

 

So, the current position is that the HMRC’s historical approach has been overturned by the courts, and has forced them into some more creative thinking, the result of which, should be a much more focused attack on MTIC fraud.

 

There are two basic types of missing trader fraud; one known as acquisition fraud, and the other, true MTIC fraud.  In acquisition fraud, a business is set up with the intention of going missing, but it is not usually part of a large organised chain. 

 

The missing trader sells to a legitimate business and then disappears with the VAT. 

 

The legitimate business either uses the goods itself or sells them on to end users.  Perfectly legitimate, honest, businesses do get caught up in these frauds, and unless their due diligence is very good, they cannot do much about it.

 

Then there is true MTIC fraud. 

 

There is some uncertainty amongst advisers as to what types of business become involved in transaction changes involving MTIC fraud.  The first point to remember is that these frauds are being financed by organised crime, usually based outside the UK. 

 

This is not some kind of advanced tax planning, but organised fraud by criminals, often with the active, and sometimes passive, co-operation of others looking to make some fast and easy profits.

 

Typically, those who organise the frauds approach young men with the promise of quick money for fronting a business for a few months and then disappearing.  The actual missing traders are normally small fish, and are easily replaced by those organising the frauds. 

 

One might ask how do the goods move around the transaction chain and end up where they started. Is it just a coincidence, or are the businesses in the chain aware of what they are doing?  When you look at these chains, something stands out. 

 

Legitimate businesses occasionally buy goods that have been used in fraudulent chains, and sometimes even from businesses that go missing.  But this is usually only a negligible part of their turnover. 

 

Businesses involved in MTIC chains normally have 90% plus of their purchases from missing traders of businesses making third party payments (i.e. they pay large sums of money to unconnected third parties, normally outside the UK – the sums are so large that they will not be able to meet their VAT liabilities, and they go into liquidation). 

 

It seems inconceivable that the businesses involved in these fraudulent chains are simply unlucky. At best they are turning a blind eye to what is going on, and just buy and sell where they are told, and for agreed prices.  As an adviser, we have a duty to represent clients to the best of our ability, but we should not be involving ourselves with MTIC fraudsters unless it is to make a full disclosure to HMRC.

 

If you have genuine suspicions about a client, and they will not make a full disclosure, you should resign as their adviser.

 

So, when is a business potentially involved in an MTIC chain? The following are a few indicators:

 

  • Is it a new business operated by young men with no track record in the mobile phone or computer industry?  Logically, how can two lads be working in their uncle’s corner shop one week, and operating a £50 million turnover mobile phone business from their front bedroom the next week?  If it seems too good to be true, it normally is!
  • Has an existing business changed completely overnight? For example, has a textile business turning over a couple of million a year suddenly given up the rag trade and moved into computer chips, immediately turning over £200 million a year? Another indicator is that new people have come into the business, and appear to be running it instead of the original owner.
  • Has the turnover of the business grown unrealistically fast? How can turnover go from nil to £200 million in a year or less?
  • Does the business have constant profit margins?  How can a business buy and sell from a dozen different companies in a quarter, and yet make exactly 50 pence per phone on all deals in the UK, and a much larger £12 per phone on exports?
  • Are businesses buying from the Netherlands, Spain and France, or selling to Dubai or Hong Kong?  These are common starts and finishes to the chains.
  • Is the business normally dealing with small businesses (small in terms of employees, not turnover) with no track record and have only been trading a few months with very little repeat business?
  • How do they finance the business? Large loans from family members - for example, obscure uncles from the Middle East who have lent £2m to a nephew they have only met once.  Is finance provided from within the trading chain itself, i.e. they only pay their supplier after they have been paid by the customer in a back-to-back deal?

 

All of these situations should alert you to the possible fraudulent nature of the business you are dealing with.  If they fall into to any of these categories, you should avoid them completely, and make an appropriate disclosure to the authorities. 

 

This list is not exhaustive and advisers should use their judgment and common sense when taking on clients or reviewing existing ones. 

 

Those organising these frauds are clever and determined.  Once the reverse charge is introduced they will probably move into other trade sectors, with digital cameras and watches etc. being obvious areas, so although they will be disrupted, they will no doubt continue, and advisers should continue to be vigilant.