Helen Thompson and Daniel Lyons outline ways that VAT-registered businesses can mitigate the risk of unwittingly participating in MTIC fraud
With the recent Budget announcement that HMRC will shortly be extending the domestic reverse charge provision to include wholesale supplies of gas and electricity, should businesses continue to be concerned about the risk of ‘missing trader inter community’ (MTIC) fraud?
The answer is, undoubtedly, yes. Tax fraud – of which MTIC is a major component – is at its highest level since the financial crisis of 2008. Any market in which taxable goods or services are traded with reasonable frequency across the EU is at risk of being targeting by fraudsters. Recent victims of MTIC fraud include participants in metal trading and voice telephony markets.
If a business is caught up in a supply chain involving MTIC and it knew – or should have known – about the fraud, then it risks losing its entitlement to recover input VAT on those purchases. It may also be exposed to penalties of up to 100% of the VAT initially recovered.
Managing the risk
So how can a business effectively manage the potential risk of being caught up in MTIC fraud? There is no single action that a business can take, but the following measures should provide some protection:
train frontline staff so that they have an understanding of MTIC fraud and know when to flag suspicious activity;
make sure counterparty due diligence is up to date and completed by persons with knowledge of the risk of MTIC fraud; and
consider any unusual trading activity – a process which can be assisted by conducting regular post-trade analysis.
For many businesses, enhancing the processes already in place to take into account the ‘red flags’ indicative of MTIC fraud can provide a significant degree of additional protection.
Litigation v negotiation
If a business is unwittingly caught up in a supply chain involving MTIC, it will be approached by HMRC and may – after an investigation – receive an assessment for input tax plus penalties. Many businesses will (with some justification) be tempted to litigate the matter, on the basis that they did not know about the fraud in the supply chain and could not reasonably have been expected to detect and prevent the fraud. Certainly, whilst a business needs to have processes and controls to reduce the risk of being used in a fraudulent supply chain, there may be instances where involvement in the fraudulent supply chain was not easily preventable.
However, what is notable is the lack of large reputable companies actually litigating on MTIC matters in the courts due to the reputational threats involved. Many companies unknowingly caught up in a fraudulent supply chain will ultimately choose to settle the matter with HMRC rather than defend their position in a tribunal. With that in mind, assisting HMRC in its investigation from an early stage can be a very effective way of reducing the settlement eventually made.
Home >Articles > MTIC fraud: prevention is better than cure
MTIC fraud: prevention is better than cure
Helen Thompson and Daniel Lyons outline ways that VAT-registered businesses can mitigate the risk of unwittingly participating in MTIC fraud
With the recent Budget announcement that HMRC will shortly be extending the domestic reverse charge provision to include wholesale supplies of gas and electricity, should businesses continue to be concerned about the risk of ‘missing trader inter community’ (MTIC) fraud?
The answer is, undoubtedly, yes. Tax fraud – of which MTIC is a major component – is at its highest level since the financial crisis of 2008. Any market in which taxable goods or services are traded with reasonable frequency across the EU is at risk of being targeting by fraudsters. Recent victims of MTIC fraud include participants in metal trading and voice telephony markets.
If a business is caught up in a supply chain involving MTIC and it knew – or should have known – about the fraud, then it risks losing its entitlement to recover input VAT on those purchases. It may also be exposed to penalties of up to 100% of the VAT initially recovered.
Managing the risk
So how can a business effectively manage the potential risk of being caught up in MTIC fraud? There is no single action that a business can take, but the following measures should provide some protection:
train frontline staff so that they have an understanding of MTIC fraud and know when to flag suspicious activity;
make sure counterparty due diligence is up to date and completed by persons with knowledge of the risk of MTIC fraud; and
consider any unusual trading activity – a process which can be assisted by conducting regular post-trade analysis.
For many businesses, enhancing the processes already in place to take into account the ‘red flags’ indicative of MTIC fraud can provide a significant degree of additional protection.
Litigation v negotiation
If a business is unwittingly caught up in a supply chain involving MTIC, it will be approached by HMRC and may – after an investigation – receive an assessment for input tax plus penalties. Many businesses will (with some justification) be tempted to litigate the matter, on the basis that they did not know about the fraud in the supply chain and could not reasonably have been expected to detect and prevent the fraud. Certainly, whilst a business needs to have processes and controls to reduce the risk of being used in a fraudulent supply chain, there may be instances where involvement in the fraudulent supply chain was not easily preventable.
However, what is notable is the lack of large reputable companies actually litigating on MTIC matters in the courts due to the reputational threats involved. Many companies unknowingly caught up in a fraudulent supply chain will ultimately choose to settle the matter with HMRC rather than defend their position in a tribunal. With that in mind, assisting HMRC in its investigation from an early stage can be a very effective way of reducing the settlement eventually made.
