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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

VAT fraud and evasion

Stephen Smith

Institute for Fiscal Studies

and University College London

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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