U.K. Tax Authorities Question Investment Banks on VAT Scams

Apr 22, 2014 6:56 am ET

(Updates with German prosecution in eighth paragraph.)

April 22 (Bloomberg) -- U.K. authorities are investigating possible tax fraud in the country’s 40 billion-pound ($67 billion) power trading markets, according to accounting firms TMF Group and Deloitte LLP.

The alleged fraud involves traders paying value-added-tax, or VAT, to energy sellers who are suspected of keeping the money rather than turning it over to the government. Such scams are known as missing trader fraud.

Her Majesty’s Revenue & Customs, or HMRC, has questioned traders from at least three trading firms, including two investment banks, according to Richard Asquith, a tax accountant at TMF in London, which advises the firms. It asked one of his clients for lists of all customers and suppliers, he said. Most of the alleged fraud involved the electricity market, Asquith said. He declined to identify the trading firms.

Tax inspectors have contacted gas and power market firms “with long and very detailed lists of questions” as part of a VAT investigation, Deloitte wrote in a March 3 note to clients.

The inquiries show that these swindles are spreading to new industries, Asquith said.

“VAT fraud starts in one industry like mobile phones and circuits and chips, and moves to carbon and power trading,” he said.

While the tax office has questioned traders for investment banks, they aren’t believed to be targets of the investigation, according to Asquith and another person familiar with the inquiries. Asquith said he doesn’t know who allegedly perpetrated the fraud.

VAT Fraud

Prosecutors in Germany are going after similar VAT fraud in the carbon emissions trading market. Last year, two U.K. citizens were arrested and eventually charged this year by Frankfurt prosecutors with evading 31 million euros ($43 million) of taxes.

VAT fraud across various industries cost the U.K. government as much as 1 billion pounds in 2011-2012, HMRC data show, versus total VAT collections of about 98 billion pounds. The data don’t itemize the tax revenue lost to fraud in specific industries.

Last month, the U.K. Treasury announced it would seek to exempt domestic power trading from the country’s 20 percent VAT levy to prevent fraud. Such exemptions typically last only a year, giving tax authorities time to stop the theft.

“This is a large market with an established risk of fraud and therefore we are taking action to remove the threat of fraud in these sectors,” a U.K. Treasury spokeswoman said.

‘Most Wanted’

An HMRC spokeswoman declined to comment on its inquiries and whether it was investigating VAT fraud in energy markets.

“For legal reasons we never confirm nor deny whether or not we are undertaking an investigation,” the spokeswoman said in an e-mail. “Due to taxpayer confidentiality we cannot confirm any names of individuals until a charge is brought.”

The agency website’s list of “most wanted” tax fugitives includes several people accused of VAT fraud, including one individual blamed for taking part in a scheme that cost the U.K. government 156 million pounds.

Laura Parsons, a Deloitte spokeswoman, said no one was available to speak about its note, which said HMRC was also investigating VAT fraud in the wholesale telecom industry.

Criminal Gangs

European law helps enable the fraud by exempting value- added tax on exports within the 28 member states in the European Union, according to tax advisers. For example, a company perpetrating the fraud tells tax authorities the product it is reselling is intended for export to another country, when in fact it is sold domestically. This deception makes it possible to carry on multiple transactions before getting caught, because tax authorities don’t expect the seller to remit any VAT.

“The world has globalized but EU tax regimes haven’t,” Asquith said. “We have this problem of gaps between national systems that criminal gangs can exploit.”

The European Commission, the EU’s executive arm, estimates that 193 billion euros of VAT was lost in 2011 among its member states due to “non-compliance or non-collection,” including fraud. That lost revenue is equal to 1.5 percent of GDP, up from 1.1 percent in 2006.

Some countries have seen sharp spikes in their uncollected VAT revenues. Greece, for instance was able to collect only 61 percent of its expected VAT in 2011, down from 78 percent in 2001. The Commission’s action plan, announced in late 2012 to combat various types of tax evasion and avoidance includes measures aimed at fighting VAT fraud.

Last year, the EU made it easier for national governments to fight such fraud by giving them the right to suspend VAT on industries they believe are subject to fraud, effectively removing any tax to steal.

Since then, the U.K., Germany, France, Netherlands, Austria and Romania have announced proposed VAT exemptions on power trading, Asquith said. Over the years, tax authorities in countries including the U.K., Ireland, Germany and France have cracked down on VAT fraud in the mobile phone, microchip and carbon trading industries.

--With assistance from Rachel Morison and Mathew Carr in London and Karin Matussek in Berlin.