Defending MTIC fraud investigations

MTIC (Missing Trader Intra-Community) fraud and carousel fraud are complex forms of VAT fraud that involve the movement of goods across international borders within the European Union. These frauds exploit the VAT system, allowing fraudsters to collect VAT on sales without remitting it to the tax authorities.

• MTIC fraud typically involves a “missing trader” who vanishes without paying the VAT collected from customers.
• Carousel fraud is a more sophisticated variant where the same goods are repeatedly sold and exported around a “carousel” of businesses, creating multiple VAT refund claims without actual goods being exchanged.

These frauds are not only financially damaging, costing billions of pounds annually, but they also create significant challenges for legitimate businesses caught up in fraudulent supply chains. As a result, MTIC and carousel frauds are high-priority targets for HM Revenue & Customs (HMRC) and law enforcement agencies across Europe.

This guide is designed to provide comprehensive information and practical advice for

• directors,
• business owners,
• shareholders,
• SMEs, and
• private clients

who may be impacted by or accused of MTIC or carousel fraud.

Navigating the complexities of these fraud investigations requires a deep understanding of both UK and EU laws, as well as the investigative processes of HMRC.

Francis Wilks & Jones, a leading law firm which specialises in defending VAT investigations, including MTIC fraud cases. We ensure clients understand their rights, defend against accusations, and mitigate risks associated with MTIC and carousel fraud.

This guide will equip you with the knowledge needed to effectively manage these challenges and seek expert legal assistance when necessary.

MTIC (Missing Trader Intra-Community) fraud is a form of tax evasion that exploits the VAT system within the European Union’s single market. This type of fraud primarily involves the import and export of goods across EU borders without the payment of VAT. The scheme typically unfolds as follows:

• Missing trader. The fraud begins with a “missing trader” who imports goods VAT-free from another EU member state. This trader collects VAT from domestic sales but disappears before remitting it to the government. The company may be a front with no genuine business activities or assets, designed solely for the purpose of fraud.
• Chain of transactions. MTIC fraud often involves a series of transactions between multiple companies, both real and fictitious. The goods may pass through several hands, making it challenging to trace the origin and destination of the products.
• Zero-rated supplies. The fraudster may declare that goods are being exported back to another EU country, making the sale zero-rated for VAT purposes. In reality, the goods may never leave the domestic market, or they are cycled back through the supply chain to initiate further fraudulent claims.
• Complex networks. MTIC fraud can involve intricate networks of accomplices, including brokers and intermediaries, who facilitate the movement of goods and funds. These networks are often transnational, further complicating detection and enforcement.

The economic impact of VAT Missing Trader fraud is significant, leading to substantial losses in tax revenue. It also distorts competition, as fraudulent companies can undercut legitimate businesses by avoiding VAT payments. The sophistication of these schemes necessitates proactive measures by businesses and authorities to detect and prevent fraud.

Carousel fraud is an advanced form of MTIC fraud that involves the repeated circulation of the same goods between different companies and countries. This creates multiple opportunities to fraudulently claim VAT refunds without any actual movement of goods. Here is how carousel fraud typically operates:

• Circular trading. Goods are circulated in a “carousel” pattern between several businesses, often across different EU countries. The cycle repeats with the same goods being sold back and forth, creating the appearance of legitimate trade.
• Multiple refund claims. Each time the goods are sold and moved across borders, the fraudsters claim VAT refunds from the tax authorities. The cycle of buying and selling is conducted at high speed to maximise the number of claims before authorities can detect the fraud.
• Collusion. Carousel fraud requires collusion between multiple parties, including both legitimate businesses and fraudulent entities. Some companies may be unaware of their involvement, while others actively participate to share in the profits.
• Goods involved High-value, easily transportable goods such as electronics, mobile phones, and computer chips are commonly used in carousel fraud due to their high turnover and value.
• International complexity: The cross-border nature of carousel fraud complicates investigations. It requires cooperation between tax authorities, law enforcement agencies, and judicial bodies across multiple jurisdictions to track and dismantle these operations.

The detection and prevention of carousel fraud require robust monitoring systems, comprehensive record-keeping, and coordinated international efforts. Businesses must implement stringent due diligence procedures to verify the legitimacy of their supply chains and prevent involvement in fraudulent activities.

VAT Missing Trader fraud exploits the VAT system, which allows for tax-free trading between EU member states. The process generally involves:

• VAT-free imports. Fraudsters import goods from another EU country without paying VAT, taking advantage of the intra-community trading rules.
• Domestic sale with VAT. These goods are then sold within the domestic market with VAT included in the sale price. The fraudster collects the VAT from buyers.
• Vanishing act. Instead of paying the collected VAT to the tax authorities, the fraudster disappears, leaving the government with a revenue shortfall. In addition to this legitimate companies may have their VAT number and identity hijacked for the purposes of the fraud, and only realise this has happened when they receive an unexpected knock on the door from HMRC.
• Re-export or disguise: Goods may be exported again, purportedly to another EU country, or disguised in the records to suggest they have left the domestic market. This cycle can be repeated multiple times, often involving shell companies and complex supply chains to obscure the fraud.

This cycle can repeat multiple times, with goods being passed through a network of companies, some of which may be legitimate but unaware of the fraud.

Businesses should be vigilant for signs of MTIC and carousel fraud to avoid unwittingly becoming part of fraudulent supply chains. Common red flags include:

• Unusual pricing. Goods offered at prices significantly below market value can indicate fraudulent activity, as fraudsters may sell goods cheaply to quickly move them through the supply chain.
• Rapid transactions. High-volume sales with quick turnaround times can suggest carousel trading, where goods are cycled rapidly between businesses to maximise VAT refund claims.
• Complex supply chains. The involvement of multiple intermediaries without clear reasons can be a sign of an artificially complex supply chain designed to obscure the fraud.
• Lack of due diligence. Suppliers or customers who are reluctant to provide detailed information about their operations, financials, or corporate structure may be hiding fraudulent activities.
• Frequent change of suppliers or customers. Consistent turnover in business relationships can indicate instability and the potential for fraudulent dealings.
• Cash transactions. A preference for cash payments over bank transactions can be a red flag, as it makes the financial trail more difficult to trace and audit.

Awareness of these indicators and implementing robust due diligence procedures can help businesses protect themselves from becoming victims or accomplices in VAT fraud.

MTIC and carousel fraud exploit the European Union’s VAT system, and several key pieces of legislation have been enacted to combat these fraudulent activities:

• VAT Act 1994. This UK legislation provides the framework for VAT collection, outlining the rules and obligations for businesses regarding VAT registration, calculation, and payment. It is the cornerstone of VAT law in the UK and is essential for understanding compliance requirements.
• EU VAT Directive (2006/112/EC). This directive establishes the common VAT system within the EU, including rules for intra-community transactions and tax collection. It aims to harmonise VAT laws across member states, facilitating cross-border trade while preventing fraud.
• EU Regulation No. 904/2010. This regulation facilitates administrative cooperation between EU member states in the field of VAT. It allows for the exchange of information and coordination between tax authorities to detect and prevent cross-border VAT fraud, such as carousel fraud.
• Fraud Act 2006. This UK act addresses fraud in general and provides the legal basis for prosecuting fraudulent activities, including MTIC and carousel fraud. It defines fraud as obtaining goods, services, or money through deceitful means and sets out penalties for offenders.

These legislative measures are supported by various guidelines and notices from HMRC, which provide detailed instructions and updates on handling VAT fraud.

Understanding how VAT laws apply to MTIC and carousel fraud is essential for businesses to ensure compliance and protect themselves from inadvertently becoming involved in fraudulent activities. Here are key aspects of how these laws apply:

• Intra-community transactions. VAT laws allow for tax-free trade between EU member states. Businesses must register for VAT in the UK and comply with the reporting requirements for cross-border transactions, including the submission of VAT returns and intrastate declarations.
• VAT registration and compliance. Businesses involved in cross-border trade must ensure that their VAT registration is accurate and up-to-date. This includes maintaining detailed records of transactions, suppliers, and customers to provide transparency and traceability.
• Zero-rated supplies. Exports to other EU countries are zero-rated for VAT purposes, meaning that businesses do not charge VAT on these sales. However, they must retain evidence of the goods leaving the country and ensure that all paperwork is correctly completed to avoid fraudulent claims.
• Joint and several liability. Under VAT laws, businesses can be held jointly and severally liable for unpaid VAT if they are found to be knowingly involved in a fraudulent supply chain. This means that companies must exercise due diligence in their dealings with suppliers and customers to avoid liability.

By understanding these aspects of VAT law, businesses can take proactive measures to mitigate the risks associated with MTIC and carousel fraud. Our expert team will help guide you through these.

HM Revenue & Customs (HMRC) provides various guidelines and notices to help businesses understand and comply with VAT regulations, particularly concerning fraud prevention. Some key resources include:

• Notice 726: joint and several liability for unpaid VAT. This notice outlines the circumstances under which businesses may be held jointly and severally liable for VAT not paid by others in their supply chain. It provides detailed guidance on conducting due diligence and recognising warning signs of fraud. Businesses are advised to maintain thorough records of transactions, verify the legitimacy of trading partners, and implement internal controls to detect suspicious activities.
• VAT Notice 700: the VAT guide. This comprehensive guide offers detailed information on VAT rules and procedures, including registration, accounting, and reporting requirements. It covers everything from the basics of VAT to complex issues such as partial exemption and special schemes, making it an essential resource for businesses to understand their VAT obligations.
• HMRC’s VAT fraud manual. This manual provides in-depth guidance on the different types of VAT fraud, including MTIC and carousel fraud. It explains how HMRC detects and investigates fraud and offers practical advice on preventing fraudulent activities. The manual includes case studies and examples to help businesses identify potential risks and vulnerabilities.
• Risk assessment tools. HMRC offers risk assessment tools and checklists to help businesses evaluate their exposure to VAT fraud. These resources assist companies in identifying potential risks and implementing measures to mitigate them. Businesses are encouraged to use these tools to develop robust internal policies and procedures that minimise the risk of fraud.

By following HMRC’s guidelines and notices, businesses can enhance their understanding of VAT fraud and adopt effective strategies to safeguard against involvement in fraudulent activities. Compliance with these guidelines not only helps prevent fraud but also demonstrates a commitment to ethical business practices and regulatory adherence. Our team can help talk you through the options which could benefit your business.

Conducting thorough due diligence and supply chain analysis is a critical first step in mitigating the risks of MTIC fraud. Here are some key practices businesses should adopt:

• Verify trading partners. It is essential to conduct background checks on all trading partners, including suppliers and customers. This includes verifying their VAT registration status, checking their financial health, and assessing their reputation in the industry. Companies should be cautious of businesses that refuse to provide necessary information or appear to be non-operational entities.
• Understand the supply chain. Businesses should map out their entire supply chain to identify all parties involved in the movement of goods. This includes understanding the role of intermediaries and ensuring that all transactions are transparent and traceable. Companies should avoid overly complex supply chains that lack clear business purposes.
• Monitor transaction patterns. Regularly monitoring transaction patterns can help identify unusual or suspicious activities that may indicate fraudulent behaviour. Businesses should be vigilant for signs such as rapid turnover of goods, large volume transactions with minimal documentation, and significant price discrepancies compared to market rates.
• Document due diligence efforts. It is crucial to maintain comprehensive records of all due diligence efforts, including the information gathered, the analysis conducted, and any decisions made based on this information. Proper documentation can provide evidence of a company’s commitment to fraud prevention and may serve as a defence in case of investigations.

By implementing these due diligence measures, businesses can reduce the risk of becoming entangled in VAT Missing Trader fraud and protect their financial interests.

A properly documented risk management and due diligence policy is essential for businesses to effectively prevent and respond to MTIC fraud. Key benefits include:

• Clear procedures and responsibilities. A documented policy outlines clear procedures for identifying, assessing, and mitigating risks. It also defines the roles and responsibilities of employees involved in the risk management process, ensuring accountability and consistency in approach.
• Evidence of compliance. Having a documented policy provides evidence that a company has taken proactive steps to comply with legal and regulatory requirements. This can be critical in defending against accusations of fraud and demonstrating good business practices to authorities and stakeholders.
• Consistent risk assessment. A formal policy ensures that risk assessments are conducted consistently across the organisation. This helps identify potential vulnerabilities and ensures that appropriate measures are taken to address them.
• Training and awareness. A documented policy serves as a basis for training employees on the importance of fraud prevention and the specific measures they need to take. It raises awareness of the risks associated with MTIC fraud and encourages a culture of vigilance and compliance within the company.

By establishing and maintaining a robust risk management and due diligence policy, businesses can better protect themselves from the threats posed by MTIC fraud.

Engaging with HM Revenue & Customs (HMRC) at an early stage can be crucial in managing the risks of MTIC fraud. Here’s why it’s important:

• Proactive communication. Establishing a proactive line of communication with HMRC can help businesses clarify any uncertainties regarding VAT regulations and compliance. It also allows companies to seek guidance on specific transactions or situations that may pose a risk of fraud.
• Building trust. Early engagement with HMRC demonstrates a company’s commitment to transparency and compliance. This can build trust with the authorities and may result in more favourable treatment in the event of an investigation.
• Identifying potential issues. By consulting with HMRC early, businesses can identify and address potential issues before they escalate into significant problems. This can include correcting any VAT reporting errors, ensuring proper documentation, and addressing any concerns related to supply chain partners.
• Access to resources. HMRC offers various resources and support services to help businesses understand their VAT obligations and prevent fraud. Engaging with HMRC can provide access to these resources, which can be invaluable in enhancing a company’s fraud prevention strategies.

By engaging with HMRC at an early stage, businesses can better navigate the complexities of VAT compliance and reduce the risk of becoming involved in MTIC fraud.

However – it is easy to inadvertently make mistakes when dealing direct with HMRC – which is why we would strongly recommend that you only speak to them with the benefit of a legal adviser at your side. Our team of experts include ex HMRC specialists who know the processes, procedures and laws. Let us help you.

Being placed under ‘extended verification’ by HMRC can be a challenging situation for any business. This process involves a detailed examination of a company’s VAT records and transactions to determine the legitimacy of its activities. Here are steps businesses should take if faced with extended verification:

• Cooperate fully. It is crucial to cooperate fully with HMRC during the extended verification process. This includes providing all requested documents and information promptly and accurately. Businesses should ensure that their records are well-organised and readily accessible to facilitate the review process.
• Seek professional advice. Engaging a tax adviser or legal expert with experience in dealing with HMRC investigations can be beneficial. Our team of experts can provide the guidance you need to respond to HMRC queries, prepare necessary documentation, and ensure compliance with all regulatory requirements. We can help you avoid costly mistakes.
• Review internal processes. Businesses should conduct a thorough review of their internal processes and controls to identify any weaknesses or areas of concern. This includes examining their supply chain, transaction records, and VAT accounting practices to ensure compliance with all relevant laws and regulations.
• Implement corrective measures. If any issues or discrepancies are identified during the extended verification process, businesses should take immediate steps to address them. This may involve rectifying any errors in VAT reporting, enhancing internal controls, and strengthening due diligence procedures.
• Maintain open communication. Throughout the verification process, businesses should maintain open communication with HMRC and keep them informed of any developments or changes in their operations. This can help build trust and demonstrate a commitment to compliance and transparency.

By taking these steps, businesses can effectively manage the challenges associated with extended verification and minimise the risk of penalties or further scrutiny from HMRC.

If you or your business are accused of involvement in VAT Missing Trader fraud or carousel fraud, it is essential to respond promptly and appropriately. Here are some key steps to consider:

• Seek legal advice immediately. Engaging a legal expert with experience in defending against fraud allegations is critical. At Francis Wilks & Jones, our VAT defence specialists have extensive experience in handling complex MTIC and carousel fraud cases. We can provide guidance on your rights, help you understand the charges against you, and develop an effective defence strategy tailored to your circumstances. Our team is lead by Andy Lynch who spent 18 years in HMRC’s specialist investigation team prior to joining FWJ. His knowledge and skills are second to none.
• Understand the allegations. It is important to thoroughly understand the nature of the allegations and the evidence against you. This includes reviewing any documents or correspondence from HM Revenue & Customs (HMRC) and identifying the specific transactions or activities under scrutiny. Our expert team can assist you in dissecting the details of the case and formulating a robust response.
• Gather evidence. Collect all relevant documentation and evidence that supports your defence. This may include transaction records, communication with suppliers and customers, and any due diligence procedures you have undertaken. Organising and presenting this evidence clearly and comprehensively is essential. Our tax team can help you compile and analyse this information to build a strong defence.
• Maintain communication. Cooperate with HMRC and maintain open communication throughout the investigation. Respond to any requests for information promptly and accurately. Demonstrating transparency and willingness to cooperate can be beneficial in resolving the matter. Francis Wilks & Jones can act as your representative, ensuring that all communications with HMRC are handled professionally and effectively.
• Avoid making admissions. It is important to avoid making any admissions of wrongdoing without consulting your legal adviser. Any statements or admissions made during the investigation can be used against you, so it is crucial to have legal guidance before responding to allegations. Our legal experts will guide you through the process, helping you avoid potential pitfalls.

By taking these steps, you can protect your rights and begin building a robust defence against the accusations.

A well-structured defence strategy is vital for effectively countering accusations of MTIC or carousel fraud. Here are some key elements to consider when building your defence:

• Challenge the evidence. Scrutinise the evidence presented against you and identify any weaknesses or inconsistencies. This may involve questioning the validity of the transactions, the credibility of witnesses, or the interpretation of data by HMRC. Our experienced lawyers can conduct a thorough analysis and develop arguments to challenge the prosecution’s case.
• Demonstrate compliance. Providing evidence of your compliance with VAT regulations and due diligence efforts can strengthen your defence. This includes showcasing your company’s internal controls, risk management policies, and procedures for verifying the legitimacy of trading partners. Our team can assist you in demonstrating your commitment to compliance and good business practices.
• Present alternative explanations. If applicable, offer alternative explanations for the transactions or activities under investigation. This may involve demonstrating that your business was unknowingly caught up in a fraudulent supply chain or that the transactions were legitimate but misunderstood by the authorities. Our experts will work with you to construct a compelling narrative that supports your innocence.
• Identify procedural errors. Investigate whether there have been any procedural errors or breaches of protocol by HMRC during the investigation. These errors can be used to challenge the validity of the evidence or the fairness of the proceedings. Our legal team is skilled in identifying and exploiting procedural weaknesses to your advantage.
• Negotiate settlements. In some cases, it may be appropriate to negotiate a settlement with HMRC to resolve the matter without proceeding to court. Our lawyers can advise on the potential benefits and risks of this approach and assist in negotiating favourable terms, aiming to minimise the impact on your business and reputation.

A strategic and comprehensive defence strategy can significantly increase the likelihood of a successful outcome in MTIC or carousel fraud cases. Francis Wilks & Jones is committed to providing the expertise and support you need to navigate this challenging situation.

There are several common defences that businesses and individuals can employ when facing allegations of MTIC or carousel fraud:

• Lack of knowledge. One of the most common defences is that the accused party was unaware of the fraudulent activities and did not intentionally participate in or facilitate the fraud. This defence may be supported by demonstrating thorough due diligence and compliance efforts. Our team can help you gather and present evidence to support this defence.
• Absence of intent. Defendants may argue that there was no intent to commit fraud and that any errors or discrepancies were unintentional. Providing evidence of a history of compliance and good business practices can support this defence. Our legal experts will work with you to build a compelling case based on your business’s integrity and operational history.
• Mistaken identity. In cases where businesses or individuals are incorrectly identified as participants in a fraudulent scheme, they can present evidence to demonstrate their innocence and distinguish themselves from the actual perpetrators. Our VAT defence specialists will help you clarify the facts and protect your reputation.
• Procedural errors. Identifying and highlighting procedural errors or breaches of protocol by HMRC can be a valid defence. These errors may impact the admissibility of evidence or the fairness of the investigation. Our lawyers are adept at pinpointing these issues and leveraging them to your benefit.
• Legitimate business activities. Defendants can present evidence that the transactions in question were legitimate business activities with no fraudulent intent. This may include documentation of the commercial rationale for the transactions and evidence of genuine trading relationships. Our team will assist you in compiling the necessary documentation and building a persuasive defence.

By employing these defences and working closely with the legal experts at Francis Wilks & Jones, businesses and individuals can effectively counter allegations of MTIC and carousel fraud. Our firm is dedicated to providing the highest level of legal support and guidance to help you achieve the best possible outcome.

HMRC uses a variety of methods to investigate and combat MTIC and carousel fraud. Here are some of the key strategies and tools employed:

• Risk profiling and data analysis. HMRC uses advanced data analytics to identify suspicious patterns and anomalies in VAT transactions. By analysing large volumes of data, HMRC can pinpoint unusual trading behaviours that may indicate fraud, such as rapid turnover of high-value goods or discrepancies in VAT returns.
• Cross-border collaboration. Given the international nature of MTIC and carousel fraud, HMRC works closely with tax authorities and law enforcement agencies across Europe. This collaboration involves sharing information and intelligence to track and dismantle fraud networks operating across borders.
• Targeted audits and inspections. HMRC conducts targeted audits and inspections of businesses suspected of involvement in VAT fraud. These audits may involve a thorough examination of financial records, transaction histories, and supply chain documentation to uncover evidence of fraudulent activities.
• Use of informants and intelligence gathering. HMRC relies on information from informants and whistleblowers to identify and investigate fraud schemes. This intelligence gathering is crucial for uncovering the operations of criminal networks involved in MTIC and carousel fraud.
• Legal enforcement and prosecution. When sufficient evidence is gathered, HMRC pursues legal action against those involved in fraud. This can involve civil penalties, freezing of assets, and criminal prosecution. HMRC works closely with the Crown Prosecution Service (CPS) to bring cases to court and seek convictions.

If your business is subject to an HMRC investigation for suspected MTIC or carousel fraud, it is important to understand what to expect and how to respond. Here are some key points to consider:

• Notification of investigation. HMRC will typically notify you in writing if your business is under investigation. This notification will outline the scope of the investigation and the specific areas of concern. It is crucial to respond promptly and engage with HMRC to understand the allegations.
• Request for information and documentation. HMRC will request access to your business records, including VAT returns, invoices, and transaction histories. You may also be asked to provide information about your supply chain, trading partners, and internal controls. Ensure that all documentation is organised and readily accessible to facilitate the investigation.
• Interviews and site visits. HMRC may conduct interviews with key personnel in your business to gather further information and assess the legitimacy of your operations. Site visits may also be conducted to inspect your premises and verify the existence of goods.
• Suspension of VAT refunds. During the investigation, HMRC may suspend VAT refunds to your business if there are concerns about fraudulent claims. This suspension is typically a precautionary measure while the investigation is ongoing.
• Outcome of investigation. The outcome of an HMRC investigation can vary depending on the findings. If no evidence of fraud is found, the investigation will be closed, and any suspended VAT refunds will be released. If evidence of fraud is uncovered, HMRC may impose penalties, demand repayment of VAT, or initiate legal proceedings.
• Appeals process. If you disagree with HMRC’s findings or decisions, you have the right to appeal. This process involves presenting your case to an independent tribunal, which will review the evidence and make a determination. Our team at Francis Wilks & Jones can provide expert guidance and representation throughout the appeals process.

HMRC issues various notices and guidelines to help businesses understand and comply with VAT regulations. These resources are essential for preventing and addressing MTIC and carousel fraud:

• Joint and several liability for unpaid VAT Notice 726. This notice outlines the circumstances under which businesses can be held liable for VAT not paid by others in their supply chain. It provides guidance on conducting due diligence and recognising warning signs of fraud.
• VAT Notice 700/47: suppliers’ declarations for zero-rated exports. This notice explains the requirements for suppliers to provide evidence of goods leaving the UK for export. It outlines the documentation needed to support zero-rated VAT claims, which is crucial for businesses engaged in cross-border trade.
• Notice 700/42: fraudulent evasion of VAT. This notice provides guidance on the legal consequences of fraudulent evasion of VAT and the penalties that can be imposed. It also offers advice on avoiding involvement in fraudulent activities and reporting suspected fraud.
• HMRC’s VAT fraud manual. This manual offers detailed guidance on identifying and preventing VAT fraud, including MTIC and carousel fraud. It explains HMRC’s investigative approach and provides advice on compliance and best practices.

By familiarising themselves with these notices and guidelines, businesses can enhance their understanding of VAT regulations and reduce the risk of involvement in fraudulent activities.

Our expert team at Francis Wilks & Jones can assist you in navigating these resources and ensuring compliance with HMRC requirements.

The cross-border nature of MTIC and carousel fraud is a key factor in their complexity and persistence. These frauds often involve sophisticated networks of companies operating across multiple EU member states. Key aspects include:

• Transnational networks. Fraudsters establish complex networks that exploit the EU’s VAT-free trading system. These networks involve multiple jurisdictions, making detection and enforcement challenging as companies rapidly move goods and funds across borders.
• Exploitation of the VAT system. Fraud schemes leverage the EU’s single market rules, which allow for tax-free intra-community trade, to evade VAT payments and make illegitimate refund claims. Fraudsters use the zero-rated export status of intra-community supplies to avoid paying VAT, then vanish without remitting the tax collected.
• Impact on member states. MTIC fraud affects member states differently, with some countries experiencing more significant losses due to their geographical and economic characteristics. Nations with high levels of cross-border trade are particularly vulnerable, as fraudsters exploit logistical and regulatory gaps.

The European Union has implemented several legislative measures and directives to strengthen the VAT system and reduce vulnerabilities to fraud:

• EU VAT directive (2006/112/EC). This directive establishes a harmonised VAT framework across member states, facilitating legitimate trade while preventing evasion and fraud. It sets out detailed rules for VAT collection and the responsibilities of businesses involved in cross-border transactions.
• VAT e-commerce package. Introduced in July 2021, this package modernises the VAT system for cross-border e-commerce, enhancing transparency and reducing opportunities for fraud. It includes measures such as the extension of the one-stop-shop scheme to simplify VAT collection on online sales and improved reporting obligations for digital platforms.
• EU regulation no. 904/2010. This regulation enhances administrative cooperation and information exchange between member states, allowing for more effective detection and prevention of cross-border VAT fraud. It provides the legal framework for joint investigations and coordinated actions against fraud networks.

Combating MTIC and carousel fraud requires close collaboration and coordination among EU member states. Key collaborative efforts include:

• Europol’s role. Europol plays a crucial role in supporting member states by providing intelligence analysis, facilitating information exchange, and coordinating operations to tackle cross-border fraud. Europol’s analysts use advanced data analytics to identify suspicious patterns and connections between companies involved in fraud.
• Joint investigations. Member states often conduct joint investigations to target fraud networks operating across borders. These efforts are supported by Europol and the European Public Prosecutor’s Office (EPPO), which provide logistical and legal support to dismantle criminal organisations involved in VAT fraud.
• Information sharing. Enhanced information sharing between tax authorities and law enforcement agencies is essential for identifying and disrupting fraud schemes. The EU’s VAT Information Exchange System (VIES) facilitates real-time exchange of VAT data among member states, enabling faster detection of anomalies and coordinated responses.

Several case studies and statistics highlight the effectiveness of collaborative efforts in combating MTIC and carousel fraud within the EU:

• Operation Vertigo. Coordinated by Europol, this operation targeted a major MTIC fraud network operating across several EU countries, including Belgium, Germany, and the Netherlands. It resulted in the arrest of key figures involved in the fraud and the seizure of assets worth millions of euros. This operation demonstrated the importance of cross-border cooperation in dismantling sophisticated fraud schemes.
• Operation Opson. Another Europol-coordinated initiative, Operation Opson, tackled fraudulent activities in the food and beverage sector, which are often used in carousel fraud schemes. It involved multiple countries and led to significant arrests and seizures, showcasing the value of collaborative action in addressing diverse forms of VAT fraud.
• Revenue losses and impact. According to the European Commission, MTIC and carousel fraud contribute to annual VAT revenue losses estimated at around €50 billion across the EU. This highlights the substantial financial impact on member states and underscores the need for continued vigilance and cooperation in combating these frauds.
• Success stories and prosecutions. Collaborative efforts have led to successful prosecutions and convictions of individuals involved in fraud networks, such as the conviction of a fraud ring in Spain that defrauded millions through MTIC schemes. These cases illustrate the effectiveness of coordinated actions and the importance of sharing intelligence and resources.

The European perspective underscores the need for continued collaboration and innovation in tackling MTIC and carousel fraud. By leveraging the expertise and resources of EU institutions and member states, the region can enhance its resilience against these sophisticated fraud schemes.

At Francis Wilks & Jones, our expert team is well-versed in the European legal landscape and can provide invaluable support to businesses navigating cross-border fraud challenges. Our firm is committed to helping clients understand their rights and obligations and develop effective strategies to protect their interests in an increasingly complex regulatory environment.

Selecting the right legal advisers is crucial for effectively defending against accusations of MTIC or carousel fraud. Here are some key factors to consider when choosing a legal team:

• Expertise in VAT and tax law. Ensure that your legal advisers have extensive experience and knowledge in VAT and tax law, particularly in cases involving MTIC and carousel fraud. This specialised expertise is essential for understanding the complexities of the VAT system and developing effective defence strategies.
• Track record of success. Look for a legal team with a proven track record of successfully defending clients against fraud allegations. This includes a history of positive outcomes in similar cases, demonstrating their ability to navigate the legal process and achieve favourable results.
• Strong investigative skills. Your legal advisers should possess strong investigative skills to thoroughly analyse the evidence and identify weaknesses in the prosecution’s case. This involves scrutinising transaction records, supply chain documentation, and any other relevant information to build a robust defence.
• Ability to negotiate and litigate. Choose a legal team that is skilled in both negotiation and litigation. Effective negotiation can lead to favourable settlements or reductions in penalties, while strong litigation skills are essential for defending your interests in court.
• Commitment to client service. Ensure that your legal advisers are committed to providing personalised and responsive client service. This includes keeping you informed throughout the process, addressing your concerns, and tailoring their approach to meet your specific needs and objectives.

Francis Wilks & Jones is a leading law firm with a dedicated team of VAT and tax experts specialising in defending clients against MTIC and carousel fraud allegations. Here are some of the key benefits of choosing our firm:

• Specialised expertise. At Francis Wilks & Jones, our team of expert lawyers has extensive experience in handling complex MTIC and carousel fraud cases. Our deep understanding of VAT and tax law allows us to navigate the intricacies of the VAT system and provide insightful advice tailored to your unique situation.
• Proven track record. Our firm has a strong history of success in defending clients against fraud allegations. We have achieved positive outcomes through strategic negotiation and litigation, demonstrating our ability to deliver results. Our reputation for excellence in tax law speaks to our commitment to achieving the best possible outcomes for our clients.
• Comprehensive and collaborative approach. We employ a team-based approach, working collaboratively to ensure that every aspect of your case is thoroughly investigated and expertly handled. Our team of tax experts, legal professionals, and financial specialists work together to build a robust defence, leaving no stone unturned in our efforts to protect your interests.
• Commercial insight and practicality. Our lawyers bring a commercial perspective to every case, ensuring that our advice is not only legally sound but also commercially practical. We understand the business implications of MTIC and carousel fraud allegations and are committed to providing solutions that align with your strategic goals.
• Personalised and client-focused service. At Francis Wilks & Jones, we prioritise personalised service and client satisfaction. We are dedicated to understanding your goals and concerns, and we tailor our approach to meet your specific needs. Our team is committed to keeping you informed and involved throughout the process, providing clear and practical advice at every stage.
• Reassurance and support. We understand that facing fraud allegations can be daunting. Our expert team is here to provide the reassurance and support you need, guiding you through the complexities of the legal process with confidence and care. We are committed to safeguarding your reputation and financial interests, ensuring that you have the best possible defence.

Choosing Francis Wilks & Jones means partnering with a team of dedicated and experienced professionals who are committed to achieving the best outcomes for you. Our expertise, commercial insight, and client-focused approach make us the ideal choice for defending against MTIC and carousel fraud allegations.

Examining case studies and real-life examples of MTIC (missing trader intra-community) and carousel fraud provides valuable insights into the complexity of these schemes and the importance of effective legal strategies. At Francis Wilks & Jones, our team of expert lawyers has successfully defended numerous clients against fraud allegations, achieving positive outcomes in challenging circumstances. Here, we present some illustrative case studies that highlight our expertise and the impact of our comprehensive approach.

Successful defence stories

Case study 1: defending a logistics company

A logistics company found itself under investigation by HM Revenue & Customs (HMRC) for suspected involvement in a carousel fraud scheme. The company had unknowingly transported goods for a fraudulent network that used its services to create false VAT refund claims.

Challenge: The company faced significant financial penalties and reputational damage, as HMRC alleged it was complicit in the fraud due to inadequate due diligence.

Solution: Our team conducted a thorough investigation, gathering evidence to demonstrate the company’s commitment to compliance and its lack of knowledge about the fraudulent activities. We presented evidence of the company’s due diligence efforts and highlighted procedural errors in HMRC’s investigation.

Outcome: We successfully negotiated with HMRC to reduce the penalties and clear the company’s name, allowing it to continue operations without further disruption.

Case study 2: representing an electronics distributor

An electronics distributor was accused of participating in an MTIC fraud scheme involving the rapid trading of high-value electronic goods across multiple EU countries. The company was unaware that its supply chain partners were part of a fraud network.

Challenge: The client faced accusations of knowingly engaging in fraudulent activities, risking severe financial penalties and potential criminal charges.

Solution: Our expert lawyers meticulously analysed the supply chain documentation and identified inconsistencies in HMRC’s evidence. We demonstrated that the client had exercised reasonable care in its business dealings and was a victim of the fraudulent scheme.

Outcome: The case was dismissed, and the client was exonerated of all charges. This outcome protected the client’s reputation and financial stability.

Lessons we learned from past cases

• Importance of due diligence. These and other cases we have dealt with highlight the critical role of due diligence in preventing involvement in fraud. Companies must implement robust procedures to verify the legitimacy of their trading partners and supply chains.
• Thorough investigation and evidence gathering. A comprehensive investigation and meticulous evidence gathering are essential for building a strong defence. Identifying weaknesses in the Claimants case and presenting compelling evidence can significantly impact the outcome.
• Collaboration with experts. Working with a team of legal and financial experts is crucial for navigating complex fraud cases. Expert analysis and testimony can bolster a defence and challenge the allegations effectively. We have a trusted network of experts we can call upon.
• Timely and strategic negotiation. Engaging in timely and strategic negotiations with authorities can lead to favourable settlements and reductions in penalties. A proactive approach can mitigate the risks and consequences of fraud allegations.

At Francis Wilks & Jones, our team is committed to helping clients navigate the challenges of MTIC and carousel fraud. Our expertise and experience in handling complex fraud cases ensure that we provide the highest level of support and guidance, protecting our clients’ interests and achieving the best possible outcomes.

VAT fraud is considered a serious financial crime with significant implications. It results in substantial revenue losses for governments and distorts market competition by allowing fraudulent businesses to undercut legitimate ones. Offenders may face severe financial penalties, including substantial fines and surcharges on unpaid VAT. In more serious cases, criminal prosecution and imprisonment are possible, while businesses implicated in fraud may suffer reputational damage, affecting relationships with customers, suppliers, and financial institutions.

Penalties for MTIC and carousel fraud can be severe and vary depending on the nature and extent of the fraud. Potential penalties include:

• Fines and surcharges. Offenders may be required to pay significant fines and surcharges on the unpaid VAT.
• Repayment of VAT. Businesses found guilty of fraud may be required to repay the VAT evaded, plus interest.
• Imprisonment In cases involving deliberate and large-scale fraud, individuals may face criminal charges and imprisonment.
• Disqualification of directors. Directors involved in fraud may be disqualified from serving as company directors for several years. We can also help defend director disqualification cases.

To protect your business from MTIC fraud, it is essential to conduct thorough due diligence and verify the legitimacy of your trading partners. Implement robust internal controls to monitor transactions and supply chain activities for signs of fraud. Maintaining detailed records of all transactions, communications, and due diligence efforts is crucial to demonstrating compliance. Additionally, engaging with legal and financial experts can provide valuable guidance to ensure your business remains compliant with VAT regulations and protected against fraud.

If you suspect MTIC fraud in your business, it is important to take immediate action:

• Seek legal advice. Consult with a legal expert to understand your obligations and rights, and develop a strategy to address the issue. Our team is on hand to speak to you today.
• Review transactions. Conduct a thorough review of recent transactions and supply chain activities to identify any suspicious patterns or anomalies.
• Report the fraud. If fraud is identified, report it to HM Revenue & Customs (HMRC) and cooperate with their investigation.
• Implement corrective measures. Strengthen internal controls and due diligence procedures to prevent future occurrences.

Yes, MTIC fraud accusations can have serious implications for personal finances, particularly for business owners and company directors. Directors and business owners may be held personally liable for unpaid VAT and associated penalties if found complicit in fraud. Authorities may freeze personal and business assets during investigations, affecting cash flow and financial stability. Additionally, defending against fraud allegations can incur significant legal costs, impacting personal finances.

Carousel fraud has several detrimental effects on the economy. It results in substantial VAT revenue losses for governments, reducing funds available for public services. Fraudulent businesses can undercut legitimate competitors, distorting market competition and harming honest businesses. Furthermore, significant resources are required to investigate and combat fraud, diverting attention from other economic priorities.

MTIC fraud typically involves several stages:

1. Importation of goods. Fraudsters import goods VAT-free from another EU member state.
2. Domestic sale with VAT. The goods are sold within the domestic market with VAT added.
3. Disappearance of the trader. The fraudster disappears without remitting the collected VAT to the authorities.
4. Circular trading. In carousel fraud, goods are repeatedly sold and exported around a network of companies, generating multiple fraudulent VAT refund claims.

Businesses can detect and prevent MTIC fraud by monitoring transaction patterns regularly to identify signs of rapid turnover or unusual pricing. Verifying supply chain partners through background checks ensures their legitimacy. Implementing clear anti-fraud policies and procedures to address fraud and providing training to employees on recognising and reporting signs of fraud are essential steps to safeguard against involvement in MTIC fraud.

Forensic accounting plays a crucial role in MTIC fraud cases by analysing financial records and transactions to identify inconsistencies or anomalies indicative of fraud. Forensic accountants trace the flow of funds through complex networks to uncover fraudulent activities and identify key players. They may also provide expert testimony in court, explaining complex financial evidence and supporting the defence or prosecution’s case.

At FWJ we have a trusted network of forensic accountants we work with on MTIC and VAT investigations.

Businesses involved in MTIC fraud can face several consequences, including financial penalties such as significant fines and repayment of unpaid VAT, plus interest. Being implicated in fraud can harm a business’s reputation, affecting relationships with stakeholders. Investigations can lead to operational disruptions and financial instability, while businesses may also face legal proceedings, resulting in further costs and potential criminal charges.

The most common types of VAT fraud include

• MTIC and carousel fraud, which exploit the VAT system to generate illegitimate refund claims through circular trading.
• Invoice fraud involves creating fake invoices to claim VAT refunds on non-existent transactions.
• Suppression fraud occurs when businesses under-report sales or inflate purchases to reduce VAT liabilities.
• Additionally, misclassification fraud involves misclassifying goods or services to benefit from lower VAT rates.

If a business unknowingly becomes involved in MTIC fraud, it should take immediate action by seeking legal advice to understand the implications and develop a strategy to address the situation. Engaging with HMRC and cooperating fully with their investigation is crucial, providing all requested information. Businesses should also implement corrective measures to review and strengthen internal controls and due diligence procedures to prevent future occurrences. Transparent communication with stakeholders can help mitigate reputational damage.

The duration of an HMRC investigation can vary depending on the complexity of the case and the amount of evidence involved. Investigations can take several months to a year or more. It is important for businesses to cooperate fully and provide requested information promptly to facilitate the investigation process.

If you receive a letter from HMRC about suspected MTIC fraud, take the following actions:

• Read the letter carefully. Understand the nature of the allegations and the specific concerns raised by HMRC.
• Seek legal advice: Consult with a legal expert to understand your rights and obligations, and develop a response strategy. Our team of experts is here to speak to you today and guide you through this process.
• Prepare documentation. Gather all relevant documentation and records to support your case and demonstrate compliance.
• Respond promptly. Respond to HMRC’s request for information in a timely manner, ensuring that all communications are accurate and complete.

International laws play a significant role in MTIC and carousel fraud cases due to the cross-border nature of these schemes. EU directives and regulations aim to harmonise VAT rules across member states, facilitating cross-border trade and preventing fraud. International laws enable cooperation and information sharing between tax authorities and law enforcement agencies to tackle cross-border fraud. Additionally, international agreements allow for the extradition and prosecution of individuals involved in cross-border fraud, ensuring that offenders are held accountable.