What Are VAT fraud schemes? How To Be Safe?

Two people have been arrested by the Italian Financial Police (Guardia di Finanza) in an investigation into a large VAT (Value Added Tax) fraud scheme. The duo were responsible for an estimated damage of approximately $53.4 million (€50 million), as per the official release.

What are VAT fraud schemes?

VAT fraud schemes are a highly complex form of tax fraud that abuse the VAT rules for cross-border transactions across the member states of the European Union. Carousel VAT frauds are often run by organized units to gain billions of euros in profit by avoiding the payment of VAT or by fraudulently claiming repayments of VAT from national authorities. This causes massive financial losses to the HMRC. Both tangible and intangible goods are targeted in these types of scams including, mobile phones and other high-value electronic goods, precious metals and gas.

How was it executed?

During the investigation, it was found that the fraud was carried out by a complex network of companies, established in several EU countries. These companies committed VAT ‘carousel’ fraud, a VAT fraud scheme that involves multiple transactions between traders or brokers with criminal traders taking advantage of EU rules on cross-border transactions.

The VAT carousel fraud was based on the sales of over 3 million items and it is suspected to be controlled from Moldova where one of the two arrested were based. The products involved in the scam included wireless earbuds, electronics, and hard drives.

As per the release, the goods were sold to companies in Italy below their market value, by avoiding the payment of VAT in multiple steps. Further by undercutting competitors, the suspects managed to sell a large quantity of products. Overall, it is estimated that the suspects evaded the payment of $53.4 million (€50 million) in VAT.

Who are the accused?

The two individuals are allegedly the primary managers of the entire scheme and are long-standing friends. One of the suspects was already a suspect of fraud and bankruptcy offenses. He has been handed over to the German authorities. The other suspect was arrested on his arrival to Italy from Moldova.

How it impacts business owners and entrepreneurs

For business owners and entrepreneurs, it is possible to become involved in VAT fraud unintentionally. They may end up buying products from fraudsters at a cheaper cost to sell them at a profit. This may have legal consequences and they may become involved in a fraud investigation.

How to be safe?

It is advised to avoid buying goods at a surprisingly low price. One should always check the complete details of the invoice of the goods. The invoice should have all essential information missing like the telephone number or address of the source and trader. Further, businesses should be cautious about buying products which are not appropriate to the sector in which the supplier operates.

Suppliers who deal in large consignments and who often change their products, or switch to a completely different sector, could be involved in a VAT carousel fraud.

Doing business or engaging with suspicious suppliers may land business owners in trouble where they may be subjected to legal scrutiny or become a part of criminal investigations.