The Impact of Missing Trader Intra-Community Fraud on

Trade Statistics

Sandra TudorHead of Statistics and Analysis of Trade Unit

• Increasing problem since the introduction of the single market

• Takes advantage of VAT system, where goods are zero rated on transactions between EU Member States

• Missing traders charge for VAT on sales but do not pay the tax to government

Missing Trader Intra-Community Fraud

A Simple MTIC carousel model2 countries

£ 950,000 + VAT£ 950,000 + VAT

(‘A’)EU

Supplier

(‘B’)UK Missing

Trader

(‘C’)UK Buffer

Trader

£900,000 + VAT£900,000 + VAT

(‘D’)UK Buffer

Trader£ 920,000 + VAT£ 920,000 + VAT

(‘E’)UK Broker

Tax Loss - £157,500Tax Loss - £157,500

£970,000 - VAT Nil£970,000 - VAT Nil £1,000,000 - VAT Nil£1,000,000 - VAT Nil

Media headlines, 2002-2003

UK growth

revised up as

deficit shrinksFT Dec 2002

Fraud cases up, financial losses downThe Register, July 2003

Two arrested

for £80m VAT

fraudBBC Sept 2003

Original work for Balance of Payments

2002 - July 2003

• Effect on Intrastat data collection– Exports are captured, Imports are not

• Correct treatment is to increase imports

• Increasing imports worsens – Balance of Trade– Current Account deficit

• Goods are usually high value/low mass

• No estimate of acquisition fraud

Impact on Trade Statistics

The adjustments

• UK’s methodology includes information uncovered by Customs operational activity

• The estimates were corroborated by:–national estimates of VAT loss– reduced EU trade asymmetries –smaller imbalances in the relevant

products in the ONS annual supply and use analysis

Next StepsAugust 2003 to Feb 2005

Project 2

• Reviewed methodology

• Looked at Acquisition Fraud

• Arranged to include the estimates in the Overseas Trade Statistics

• Compared data sources:– Arrivals, ESL purchases, VAT declarations– Dispatches, ESL sales, VAT declarations

Project 2

• Investigated how best to incorporate the adjustments for 1999 – 2004 into HMRC’s Overseas Trade Statistics–Uses 3 month rolling average

• Second joint article published Feb 2005

Further developmentsNon-EU trade

MTIC carousel model, with non EU

(‘A’)EU

Supplier

(‘B’)UK Missing

Trader

(‘C’)UK Buffer

Trader

£900,000 + VAT£900,000 + VAT

(‘D’)UK Buffer

Trader£ 920,000 + VAT£ 920,000 + VAT

(‘E’)UK Broker

£ 950,000 + VAT£ 950,000 + VAT

Tax Loss - £157,500Tax Loss - £157,500

£970,000 - VAT Nil£970,000 - VAT Nil £1,000,000 - VAT Nil£1,000,000 - VAT Nil

(‘F’)non EU Trader

(‘G’)EU Trader

(‘H’)EU Trader

Third Project

Estimates of missing trade (EU arrivals)

Year Estimate (£bn) 1999 1.72000 2.82001 7.22002 11.42003 4.42004 32005 11.5

Asymmetry between UK arrivals and rest of EU dispatches (£bn), 1992 - 2005

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

UK arr +MTIC

EU disp

UK arr

New Issues

• Non-EU countries involved in chains

• Scale of revisions

• Reverse charging

• Identifying turning points

Media headlines, 2006

Fears over fraud

as VAT receipts

slumpGuardian April 2006

Customs officers foil VAT fraudBBC news Sept 2006

VAT criminals

may force tax

rises as scams

near £30bn

Guardian July 2006

• We continue to produce monthly estimates of the impact of the fraud for the OTS, BoP and Eurostat trade data

• We monitor changes in the pattern of trade –commodity–country

Ongoing work

• Need to continually monitor changes

• Close links between SATU and Customs important

• Conflicting requirements

• Use of a range of data

Lessons Learnt

If you want more information please contact:sandra.tudor@hmrc.gsi.gov.ukandrew.kochen@hmrc.gsi.gov.uk