HMRC managed to collect more VAT in 2012-13 but reduced the estimated outstanding annual amount by only £579m, says the body's annual report out yesterday.
According to HMRC's 2012-13 year accounts made up to 31 March 2013, VAT collection rose 0.3 per cent to £1.4bn in the year, including £579m in potentially "erroneous and fraudulent repayments" picked up and prevented by checks and intelligence.
For 2010-11 – the latest year for which HMRC reported figures – the total amount of missing VAT was estimated at £9.6bn or 30 per cent of an overall estimated annual tax gap of £32bn.
"HMRC has made good use of intelligence to respond to the risks of VAT fraud and its checks prevented £579m of erroneous and fraudulent repayments in 2012-13, but it does not carry out comprehensive real-time checks across all VAT returns," wrote Amyas Morse, the comptroller and auditor general of the National Audit Office (NAO), in an accompanying statement.
The NAO found that while HMRC has moved to close VAT loopholes and launched various initiatives to improve VAT collection, it also needed a "comprehensive plan to react to the emerging threat" of VAT losses from internet trading.
During the year to 31 March, there were five write-offs of VAT, interest, surcharge and penalties relating to carousel activity or missing trader intra-community fraud (MTIC) of at least £10m each, totalling £104m, according to the annual report.
"HMRC estimated that MTIC fraud constituted between £0.5bn and £1bn of the VAT tax gap [in 2010-11]," it reported. "A range of customer behaviours contribute to the VAT gap, including errors, failure to take reasonable care and conflicting legal interpretations."
HMRC has concentrated its attention on deliberate evasion and criminal behaviour. It estimates MTIC fraud losses, and VAT debt (£0.9m in 2011-12), but does not give a full breakdown of missing VAT by reason.
"Fraudulent behaviour contributes to the VAT tax gap in a number of areas:
• Hidden or shadow economy fraud: genuine businesses with a turnover above the VAT registration threshold who do not register for VAT;
• Suppression of revenues: genuine businesses with legitimate trading activity perpetrate a fraud by understating a portion of their sales or by falsely inflating their claims for the VAT on purchases to reduce their tax liability; [and]
• MTIC fraud: fraudsters register for VAT in the UK to buy goods from other EU member states VAT-free. They subsequently sell goods in the UK inclusive of VAT without paying over VAT due to HMRC; and
• Repayment fraud: fraudsters registered for VAT make false claims for repayments," it reported.
Additionally, HMRC reported eight tax write-offs relating to insolvency of more than £10m each, worth £464m, up from £181m in 2011-12 – some of which were related to VAT claims.
The increased VAT collection brought the country's total tax take to £475.6bn in the 2012-13 year. It comprised 21 per cent or £101bn of total HMRC revenue for the year.
During 2012-13, HMRC estimates that 4,120 caseworkers of its 64,476 full-time-equivalent staff were allocated to managing the risk of VAT-non-compliance, and about half concentrated on fighting VAT fraud per se.
It is currently reviewing and developing new tactics against VAT fraud – not least because in March 2013 it says it discovered "a number" of traders submitting repayment requests for VAT amounts just below HMRC's investigation threshold.
This demonstrates, according to HMRC, the sophistication and knowledge of fraudsters, some of whom submit multiple registrations and returns to figure out how HMRC operates its fraud controls.
"The new system is intended to be introduced in autumn 2013," said HMRC.
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