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In the first article in his series on Missing Trader Intra-Community (MTIC) fraud, Carl Watson of Chantrey Vellacott DFK examined the mechanics of this highly organised fraud. In the second part, he looks at how the fraudsters have taken full advantage of favourable circumstances to turn the activity into the large-scale, profitable criminal endeavour that weakens EU member states’ exchequers today.

CarlWatson is a counter fraud specialist at Chantrey Vellacott DFK. He may be contact on tel: +44 (0) 20 7509 9154; email: cwatson@cvdfk.com

Pre-history

Although MTIC-type frauds in their present form began emerging in or around 1997, they can be traced back to other forms of VAT fraud that were being successfully perpetrated in the UK much earlier. Among the most prevalent types were the gold frauds, which were conducted at great cost to the exchequer in the 1980s and ’90s. These started with traders importing or smuggling gold into the UK and selling it on, before disappearing with the VAT on the sale that should have been paid over to HM Customs and Excise (now HM Revenue and Customs). The purchaser of the gold would then reclaim as input tax the VAT that it had paid to the missing supplier, crystallising the loss to the exchequer. In order to combat this, a change was introduced in April 1993 to the VAT treatment of fine gold and gold coins, effectively introducing a reverse charge where the purchaser, rather than the supplier, accounted for the VAT on the supply. Undeterred, the fraudsters adapted the scheme, and started mis-describing fine gold as low-grade gold (less than 24-carat) to enable them to continue to charge and steal VAT on the supplies. The scheme was ultimately stopped in November 1995, when the reverse charge system that applied to fine gold was extended to gold of any purity. This sounded the death knell for the gold frauds, but the model had been set for the MTIC frauds that would emerge in their wake.