How to avoid getting tangled in VAT fraud

Credit guru Eddie Pacey explains how businesses can scrutinise their supply chains to make sure they don't become a scapegoat in a VAT fraud

Is enough really done by companies and HMRC to counter and nullify VAT fraud? In my view, not quite enough is done by either but HMRC could and should do much more.

Since 2003, HMRC has raised its game; it produced a leaflet on "how to spot missing trader VAT fraud" and followed with sending companies Form 726 Notices on Joint and Several Liability for unpaid VAT but this is not sufficient enough to ensure business owners are adequately equipped to tackle this type of activity or be properly warned of the consequences.

(VAT fraud or missing trader intra community [MTIC] is described by Europol as the theft of VAT from governments by organised criminals. The full definition, and explanation of complex cases, can be found here.)

The problem centres on the checklist companies are asked to consider in making sure of the integrity of a supply chain and the legitimacy of customers and suppliers. Many of these are standard and will apply to legitimate business activity and it is how a business owner is supposed to make a judgement on sudden noted new business or increased business using such checklists that makes the current advice fall short. Giving companies four, five or six copies of Form 726 over a period of time is an appalling way of attempting to control MTIC and VAT fraud. This slow and cumbersome approach of repetitive ‘chucking' of forms, visits and interviews results is far too many MTIC traders not being VAT de-registered early enough to cut the chain.

Section six of Form 726 is titled ‘Dealing with other businesses, how to make sure the integrity of your supply chain'. It goes on to list bullet-point subheadings in a question format that do not in essence warn companies precisely what is indicative of VAT fraud transactions.

They're answerable with either a yes or a no but there is nothing there to suggest what a business should do in the event of either too many yes or no answers. Is it risky business or isn't it?

If the aim is to seriously warn businesses of the consequences then Form 726 needs to be an instructional guide not a yes/no questionnaire. Let's assume a redraft looks like this:

Section 1)

• You must research and validate your customers' and suppliers' trade in product
• Beware of buyers or sellers you are not familiar with and are seemingly able to immediately trade in large quantities and specifications
• Beware of suppliers or buyers that mutually introduce themselves and are able to trade immediately to required levels, quantities and specifications, especially on a pre-paid basis
• Question any deal that provides no commercial risk to you, for example one that allows you to be paid before paying the supplier, especially if the supplier would be in no position to offer you open credit terms to such value given your company credit rating.
• Beware of repetitive trade or promised trade that guarantees you an assured fixed gross profit margin irrespective of timing, quantity or specification
• Avoid any transaction that requires you to pay a third party or off-shore bank accounts
• Ensure goods are insured
• Ensure and evidence formal contractual arrangements irrespective of deal size
• Beware of any supplier or client recently incorporated that is seemingly offering to trade in significant quantities and values
• Ensure the integrity of supply and question unusually low pricing

I now add a few more that should be included:

• Validate the authenticity of new business brought into your company by new sales or purchasing personnel
• Avoid any trade where a supplier asks you to export to a customer on their behalf as they cannot fund the VAT
• Always ensure supplier accreditation to sell product offered and seek information as to their source of supply if not so authorised
• Do not accept a UK domestic supplier invoice in euros
• Ensure you control despatch or release of goods even if using the suppliers' or customers' logistics company
• Insist on ad hoc inspection of goods when exporting via logistics hubs
• Do not ship to a country other than that of the buyer irrespective of pre-payment
• Question the ability of any client to pre-pay large sums and verify bank accounts
• Ensure goods for sale in UK are of UK specification
• Beware of recent changes in ownership or trading activity of suppliers and customers
• Beware of a customer's sudden increases in revenue, more so when this is largely exports
• Avoid or be watchful of a supplier that offers you a higher gross margin than they achieve
• Be alert to being asked to suddenly engage in trade of products you normally do not buy or sell

Section 2)

• Ensure there is a market and appetite for the type of goods traded and question deals involving end-of-line product and compare pricing structures
• Ensure pricing is not likely to be affected should the duration of the supply chain be extended
• Show that proper commercial practice has been applied in negotiating prices by showing for example you have considered other suppliers' availability and pricing
• Avoid third-party payments unless they legally secured and formally agreed
• Validate and evidence why credit terms are offered or pre-payment is required

Section 3)

• Ensure goods purchased and supplied actually exist. Do not rely simply on a buyer not complaining about shortages or quality or product specification
• Be very careful of entering a supply chain for product you do not normally purchase
• Ensure all goods are as described, in good condition, not damaged and ensure inspection
• Question any deal that looks abnormally large compared with others your company normally engages in
• Do not export goods that are destined or intended for the UK market
• Ensure your supplier is able to provide you with IMEI or other serial numbers and avoid trade if they cannot
• Ensure there is no recourse to you if the goods are not as described
• Retain all commercial transaction documentation

Section 6.2 bullet points half a dozen or so actions to take in checking proposed business partners which arose out of a 2003 consultation document but again is not as clear and concise as it should be and I suggest the following:

• Obtain a copy of VAT registration document and validate VAT registration numbers (including those in Europe) with HMRC (VIES)
• Request copy of any overseas chamber of commerce documentation
• Provide all new clients with an account application form to be signed by a duly authorised person and agree terms and conditions
• Obtain full business reports and credit checks on new clients/suppliers from an independent third-party provider
• Validate and consider applicants' websites in terms of quality and nature of trade
• Ensure bank details provided match any suggested or incoming payments
• Google search location to ensure business premises match nature of the proposed business activity. Google Street View is a great way of looking at a proposed client location and premises
• Once trade commences, be watchful of increasing volumes and ensure you engage in daily VAT validation reports should this be the case
• If any question or doubt persists, contact HMRC for further validation

Form 726 would carry more leverage and weight if this type of ‘instructional' format were to be used as opposed to the current question tick-box list with no onward advice or suggested course of action.

Business owners handed the current Form 726 or receiving it via mail will either quickly read certain sections or simply pass the form to their accounting or finance functions, having reached perhaps a conclusion that given the nature of their business, they're unlikely to find themselves embroiled in such MTIC activity.

HMRC guidance therefore today is simply a case of ‘here are some things to watch out for, we're not going to tell you exactly how to behave from a commercial perspective but we may refuse to repay you at some point in the future if we think you've not applied yourself correctly'.

It should be far more punchy and direct in what it expects business owners and senior management to do. It should also facilitate a contact point within HMRC that would allow businesses to call and validate new or unusual trade approaches. Imagine what a wealth of additional information this would provide HMRC, how much earlier the intervention and how reduced the cost to the public purse would be.