A carousel is a merry-go-round, but in the business world, it can also be a construction for defrauding the remittance and refund of VAT. This blog tells you all you need to know about VAT carousel fraud: what it is, what its consequences may be, and what is being done about it.
A VAT carousel is a fraudulent construction in which at least three companies in a chain resell goods (or services) to each other with the intention of reclaiming VAT without paying it to the tax authority.
This means that at least one company in a VAT carousel charges its customer VAT, without declaring it to the tax authority. At the same time, it claims a VAT refund when reselling the goods. As such, the mala fide company keeps the VAT received, thus disadvantaging the treasury.
VAT carousels can take different forms, but they often involve a complex construction with numerous companies in different countries. Companies that do declare their VAT in good faith can also end up as links in a VAT carousel. Indeed, the more complex the carousel setup, the more difficult it is for the authorities to detect the fraud.
Carousel fraud is a special form of tax fraud because the authorities do not just miss out on tax revenue, but even lose money on the fraudulent activities of the VAT carousel.
Carousel fraud is possible because the tax authorities mostly trust the returns that companies must file themselves. Also, refunds are granted quite promptly. Audits are relatively sporadic, which means VAT carousels can often operate for quite some time. When the fraud eventually is discovered, the mala fide companies will often be long gone and the managing directors will have disappeared.
The following simple example involves three companies: A, B (the fraudulent company), and C. In this case, Company A is based in France, and Companies B and C in Belgium. Suppose that Company A supplies goods to Company B; it does not have to charge VAT for this because it is an intra-community supply (a cross-border supply within the EU). Company A also does not have to remit VAT to the authorities.
If Company B then sells the same goods within Belgium to Company C, it will have to charge VAT for this and remit it to the VAT Authority. Should Company B decide not to declare VAT, then this company is fraudulent. In such a case, we refer to it as a leak.
Company C will be entitled to deduct the VAT on the goods purchased on its VAT return. If Company C then sells the goods back to Company A in France, then (as with the first intra-community supply) no VAT will be charged and the carousel can start all over again.
The fraudulent company in a VAT carousel (Company B in our example) is also known as the missing trader or 'buffer'. Such companies are usually set up solely with a view to defrauding and are often completely ‘emptied’ over time.
The consequences of VAT carousel fraud for the authorities are clear as it could cost the treasury a lot of money, especially if the carousel remains active for months.
And if your company is suspected of carousel fraud, the consequences will be considerable. Of course, there is the reputational damage in the event of a raid. Moreover, you may be denied the right to the deduction of VAT, which will be detrimental to your company’s liquidity. You could also be held jointly and severally liable for the entire unremitted VAT amount, at least if you knew (or should have known) about the fraud. Finally, you also risk administrative penalties.
If you want to avoid getting involved in a VAT carousel, you should always carefully check the buyers and suppliers you are dealing with, especially if they have not been in business for long. Similarly, it is suspicious if a supplier recommends a particular customer for your goods, or vice versa. Also, frequent switching of suppliers can be a signal.
Finally, be especially vigilant if certain valuable goods are offered below the regular market price.
If you suspect you may have inadvertently got involved in a VAT carousel, it is best to report this to the authorities.
Of course, it goes without saying that companies must file their VAT returns correctly. Incidentally, did you know that you can do this easily with Billit?
Also read: How can I submit my VAT return via Billit?
One of the main developments in the battle against the VAT gap (the difference between the expected VAT revenues and the actual received VAT income) is that of Structured Electronic Invoices (SEIs) and their transmission via the secure Peppol network.
The objective is to make it possible in the future to declare VAT in real time, based on data in electronic invoices. It would mean that authorities would no longer have to rely on the companies to be truthful in their returns, as VAT would be declared immediately on every sale. In this way, VAT carousel fraud and VAT fraud in general will become virtually impossible. In any case, electronic invoicing will make it easier to detect such practices quickly, both at Belgian and European levels.
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