Fraud in the supply chain

www.pwc.co.uk

April 2017

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July 2006Loss of the right to claim input tax – Kittel

April 2017Fraud in the supply chain

Slide 1

In Axel Kittel v Belgium (Joined cases C-439/04) and C-440/04), the CJEU held that where the recipient:

‘knew or should have known’ that his purchase involved him participating in a transaction ‘vitiated by fraud’, the tax authorities may refuse this entitlement to deduct input VAT

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Western EuropeThe fraudsters are ever changing

April 2017Fraud in the supply chain

Slide 2

The evolution of the vehicle of fraud

1 2 3 4 5 6

Extended verification –investigations

Mobile phones

White goods, high end

electronics e.g. Playstations

Precious metals e.g.

platinum and silver

Carbon credits

(service)

Pharmaceuti-cals, Voice

over IP

Wholesale supply of gas

and electricity, urine

testing kits

Extended verification –investigations

Bond House Kittel, extended

verification –Repayments

Reverse charge

More collaborative

approach

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UKMore than VAT

April 2017Fraud in the supply chain

Slide 3

Current indirect tax frauds

1 2 3 4 5 6

Smuggling

diversion

contraband

Alcohol duties

Tobaccoduties

Landfill tax Second hand cars

Construction labour

Online marketplaces

Smuggling

diversion

contraband

Mis-classification

Missing trader

Missing trader

Overseas sellers

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CEE Impact of VAT fraud

April 2017Fraud in the supply chain

Slide 4

Czech Republic Hungary Poland Romania Slovakia

bln. EUR 3.37/year

bln. EUR 2.93/year

bln. EUR 2.51/year

bln. EUR 8.29/year

bln. EUR 10.13/year

Amount of prejudice to the

state budget – bln. EUR 3.37 annually,

reaching

2.16% of GDP

VAT fraud is estimated at bln.

EUR 2.93 per year, representing

2.90% of GDP

The VAT Gap

reached 3.4% of the GDP in

Slovakia – Approx. bln.EUR 2.51

The VAT fraud in Romania reached

5.69% of GDP – Approx.

bln. EUR 8.29

The losses connected with VAT Gap were estimated at bln. EUR 10.13,

amounting

2.57% of GDP

Source: Study to quantify and analyse the VAT Gap in the EU Member States 2015 Report – European Commission, TAXUD.

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CEE VAT fraud patterns and migration

April 2017Fraud in the supply chain

Slide 5

Industries affected by VAT fraud

Carrouselfraud

Missing trader

Mobile phones

IT components

Cars

VAT fraud patterns early applied in UK, Germany and Belgium were replicated in CEE countries

Romania

Food products, cereals, sugar products; fraud in energy and construction industries, supply of utilities

Hungary

Textile products, metal waste, computer parts, agricultural products in general, milk, cooking oil, sugar

Slovakia

Agriculture, construction, wholesale and retail trade and public catering industries

Czech Republic

Raw gold, non-ferrous metal, metal scrap, computer parts, mobile phones, textile, glass products

Poland

IT equipment, IT services, gold, steel, cars,soft-drinks, textiles, scrap metal, fuels, cosmetics, shipping, construction services

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Links between Western Europe and CEEIt’s all over? Not yet!

April 2017Fraud in the supply chain

Slide 6

UK retailer purchasing goods on the grey market

Polish tax authorities contacted HMRC who asked the retailer to account for what they had done

HMRC’s view was that they could assess for the missing Polish VAT

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EuropeBusiness impact of indirect tax fraud

April 2017Fraud in the supply chain

Slide 7

1

3

5

2

2

6

Business intelligence procedures

Unfair competition

Hidden VAT costs

Seizure of wealth

Loss of reputation

Rising burden of tax compliance

Joint liability and risks for bona fide traders

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UK – Implications of getting it wrong

April 2017Fraud in the supply chain

Slide 8

Input VAT deduction withheld or tax assessment raised

New penalties for participating in VAT fraud

Failure to prevent the criminal facilitation of tax evasion

Joint and several liability for online marketplaces

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Supplier due diligence is about more than credit checks and more than just filing it

How do you monitor spikes in trade?

How do you identify critical changes?

Is it ‘too good to be true’?

What renewal checks do you do?

How do you pick up new supply chains?

How do you pick up changes in supply chains?

How do you educate:

• Trading floor?

• Procurement teams?

• Purchasing teams?

What do you need to do?Manage the risks

April 2017Fraud in the supply chain

Slide 9PwC

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The ChallengesWhat goes wrong

April 2017Fraud in the supply chain

Slide 10

Turning a blind eye to

deals that are too good to be

true

Spotting cloned suppliers/

VATnumbers

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Fraudsters are one step

ahead

Failure to act on due

diligence Static due diligence –Snapshot

Data too big to spot the

issue in real time

Speed and volume of

transactions

Changes in the supply

chain

‘Box ticking’

Gap between tax and the

trading floor

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The FutureDevelopments

April 2017Fraud in the supply chain

Slide 11

• Increased regulation

• More onerous responsibilities

• Split payments?

• More reverse charge

• Increased collaboration between tax authorities

• Tax authority access to transactional data (SAFT)

• Tax authority real time access to data and point of sale recording

• Use of ‘big data’ analytics

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Future developments…..

April 2017Fraud in the supply chain

Slide 12

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