Avoiding MTIC Fraud
MTIC fraud (carousel fraud) involves goods, imported VAT-free, being sold through contrived business-to-business transaction chains in the UK.
Tax losses occur when the VAT charged on the initial sale of the goods in the UK is not paid to HMRC because the seller disappears.
Under reverse charge accounting, it is the responsibility of the purchaser, rather than the seller, to account for the VAT on the transaction.
So, the supplier will not charge VAT but will specify on the invoice that the reverse charge applies. Provided that the purchaser correctly accounts for the VAT under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules.
Example:
This example involves three parties.
An Exporter, not located in the UK, selling mobile phones in bulk.
GB tax registered, Importer/Wholesaler buying mobile phones from exporter.
GB tax registered, Purchaser/Retailer selling mobile phones to individuals.
And these transactions:
The Importer/Wholesaler imports a large number of phones VAT-free from the Exporter.
He sells all the phones to a Purchaser/Retailer. Because he is GB VAT registered, he charges VAT on the selling price. He records OUTPUT VAT in his accounts, this is payable to HMRC.
The Purchaser/Retailer pays for the phones and pays the OUTPUT VAT to the Importer/Wholesaler. He records the amount of VAT he has paid to the Importer/Wholesaler as INPUT VAT which he is entitled to reclaim from HMRC.
The Importer/Wholesaler now disappears with all the money that is due to HMRC.HMRC has a tax loss.
Carousel fraud is actually a little more complicated than this, sometimes involving a string of deals, but the fraud occurs when Importer/Wholesaler gains the OUTPUT VAT he charged the Purchaser/Retailer and HMRC gets nothing.
Under reverse charge accounting.
Our Importer/Wholesaler imports a large number of phones VAT-free from the Exporter.
He sells all the phones to a Purchaser/Retailer.
Now, this type of goods falls within the Reverse Charge Accounting rules so:
The Importer/Wholesaler will only be paid for the goods. He will not receive the OUTPUT VAT.
The Purchaser/Retailer will account for VAT on the transaction by recording the OUTPUT VAT himself and becoming responsible to HMRC for this amount.
The Purchaser/Retailer then also accounts for the VAT as INPUT VAT and the net effect is that:
The OUTPUT VAT and the INPUT VAT for the transaction are netted together, but
He pays less out at the point of purchase, so
The net affect for our Purchaser/Retailer is no different.
The Importer/Wholesaler can now disappear but he will be empty handed.