Vat fraud and evasion
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VAT fraud and evasion. Stephen Smith Institute for Fiscal Studies and University College London. Was the shortfall in VAT receipts in 05–06 a one-off, or a lasting problem?. VAT revenue losses to fraud and evasion jumped by £2.7bn in 2005–06 . HMRC publish annual estimates of the “VAT gap”

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VAT fraud and evasion

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Vat fraud and evasion

VAT fraud and evasion

Stephen Smith

Institute for Fiscal Studies

and University College London


Was the shortfall in vat receipts in 05 06 a one off or a lasting problem

Was the shortfall in VAT receipts in 05–06 a one-off, or a lasting problem?


Vat revenue losses to fraud and evasion jumped by 2 7bn in 2005 06

VAT revenue losses to fraud and evasion jumped by £2.7bn in 2005–06

  • HMRC publish annual estimates of the “VAT gap”

    • The difference between hypothetical full-compliance receipts, based on household spending data, and actual receipts

  • VAT gap in 2005–06 was £12.4 billion

    • (14.5% of potential VAT revenues)

    • Up from £9.7bn in 2004–05


Vat frauds

VAT frauds

  • “Routine” evasion – as with all taxes

  • VAT is vulnerable to outright fraud, exploiting features which generate entitlement to VAT refunds

  • Carousel frauds exploit two key features of the VAT system

    • VAT zero-rating of exports

    • “deferred payment” of VAT on imports


Carousel fraud what could be done

Carousel fraud: What could be done?

  • Straightforward things:

  • More vigorous investigation

    • But carousel frauds happen quickly

  • Be more bureaucratic

    • Make VAT registration difficult

    • Slow down refunds


Reverse charging

Reverse charging

  • Buyer is made liable for VAT

  • UK proposed selective reverse charging for certain commodities

    • Boundary issues

    • Fraud might move on


Ending vat refunds to exporters

Ending VAT refunds to exporters

  • VAT refunds to exporters break the “VAT chain”

  • Abolish zero-rating of exports

  • Maintain the VAT chain across EU frontiers


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