A vote today by EU Finance Minister in Luxembourg will aim to secure a permanent solution to VAT frauds on high value commodities. It comes as the estimated £30bn VAT ‘Missing Trader’ fraud issue in the past six years is now appearing last month for the first time in the large Germany-London power trading market. Tax authorities in Germany identified two frauds in May, and are warning the industry.
Germany the main target so far
Germany is the largest power trading market (the EU market is worth £3bn per annum). There is over €295bn (Bloomberg) of trading handled in the London market alone. Two current German fraud cases are under investigation, running into multi-million Euro losses. In May, the German Federal Tax Office and national grid regulator issued warnings of unusual activity in the market that indicated potential fraud. They believe criminal gangs are now moving into this market following the closing of similar VAT loopholes in mobile phones and carbon emissions markets.
Other countries raising warnings
The Czech Republic is also reporting signs of manipulation, and the Czech energy company ČEZ has stopped trading with smaller companies. The UK’s HMRC has issued guidelines to the industry to help identify potential energy-related fraud. HMRC has said it has detected a number of attempts to set up potential missing trader frauds in the UK power market.
UK breakthrough as EC threatens to withdraw its special exemption
The UK was granted special permission (derogation) by the EU to exempt the sale of items at high-risk of fraud in June 2007 – the UK was the largest single target of such EU-wide frauds for mobile phones and chips. However, last week the EC warned the UK that it was not prepared to extend this derogation beyond 31 December 2013.
The UK has therefore worked to secure a European-wide deal for a rapid-response mechanism to the problem, which includes an option for any EU country that believes it is facing significant amounts of VAT fraud in power to use the VAT exemption at short notice. A number of countries had been blocking this idea since 2012 because of a dispute over which country might lose out on tax revenues.
The UK compromise means EU finance ministers will now pass the measure today, 21 June, in Luxembourg
Criminal gangs are now migrating from mobile phones and carbon emission trading to power. The stakes are much higher, and because power on national grids is effectively intangiable, it will be harder for tax authorities to trace. This is a very timely breakthrough for the UK and Germany.
Cross-border European VAT fraud rampant
‘Missing Trader’ fraud involves large, organised criminal gangs taking advantage of some of the flaws in the pan-European VAT systems. Fraudsters obtain a VAT number in an EU country which enables them to buy small, high-value goods on the pretence that they will then sell them in another EU country – a transaction which is VAT free. However, they actually sell the goods locally with a VAT charge (e.g. 20% in the UK) which they then retain instead of paying over to the local tax authorities.
A variation of this, known as ‘Carousel Fraud’ involves the same goods being sold and re-sold many times over. Some cases of such fraud run into the hundreds of millions of pounds before the criminals are caught or close down their operations and vanish.