gordons llp regulatory carousel fraud

Carousel Fraud: A Fun Fair for Criminals?

Wednesday 15th June 2022

You may have heard of carousel fraud (also known as missing trader fraud) but do you know the ins and outs and what to spot?

What is carousel fraud?

Carousel fraud is the evasion of VAT (or national ‘sales’ tax equivalent) by organised crime groups. They do this by creating duplicitous paperwork chains in sale transactions to avoid paying tax to HMRC/national governments. The crime involves trading (or purporting to trade) goods or services between EU member states by producing a series of sales invoices to avoid paying VAT. In the end, the entity that was liable to pay the VAT tax vanishes from the face of the earth. That is if they get caught. If they don’t get caught, the cycle starts again hence the name.

How does carousel fraud work?

Here’s a simple example:

  1. Business A (in Poland) sells goods to Business B (In Germany). As Business B is located in a fellow EU member state there is no sales tax payable on the transaction.
  2. Business B then sells these goods to Business C (also located in Germany),. Business B charges sales tax to Business C because it is a national transaction.
  3. Business B then disappears without paying the sales tax to the national government. Business B is then known as a ‘missing trader’.

Often, money doesn’t actually change hands and/or the goods don’t actually exist. The arrangement is merely a series of fake invoices between multiple companies.

Carousel VAT fraud is extremely hard to detect. It is usually only once Business C sells the goods to an EU customer that the fraud is discovered by the tax authorities.

Because Business C paid the sales tax when purchasing the goods, it then tries to reclaim the tax from its national tax authority. However, because the tax was not paid over by Business B (the missing trader), the national tax authority (HMRC in the UK) sees the fraud.

What are the red flags for detecting carousel fraud?

Common red flags include:

  • Businesses that have recently been incorporated and have no financial history or little/no established presence in the industry.
  • Contacts that have no real knowledge or background of the market or product they purport to be trading in.
  • Transactions which involve small, portable, high-value items, such as microchips or mobile phones.
  • Spontaneous invitations from organisations offering an easy profit on high value/volume deals for little or no risk.
  • Payment instructions to a third party or an offshore account from sole traders who have a history of selling wholesale ‘high value, low volume’ trade. This includes mobile phones or computer parts.

How can we help?

By conducting due diligence and ‘know your customer checks, you can reduce your chances of being involved in VAT fraud. You may have innocently been caught up in fraud and only realise when a letter from HMRC lands through your door.

If you need expert legal support concerning suspected VAT fraud, please get in touch with our regulatory experts Peter Hampson and Harvey Blake.