Recent cases have highlighted concerns that VAT “missing trader fraud” fraud could be spreading from the carbon emissions market to the UK power and gas markets.

What is it?

Under the normal VAT system, when a business sells goods or services to a customer, it charges the customer VAT which the seller pays to HM Revenue & Customs. The customer also gets a VAT receipt and if he is VAT registered, he can then reclaim the VAT paid from HM Revenue & Customs.

In a typical VAT fraud however, the seller does not pay the VAT to HM Customs & Excise but the purchaser is still entitled to reclaim it from HM Revenue & Customs. The result is that the Treasury is financing the customer’s VAT refund. This is also sometimes known as “carousel” fraud since the trades sometimes pass through a chain of businesses before the fraud is perpetrated and the same trades may continue to circulate around a chain.

When did it start?

The fraud first surfaced in the UK in the early years of the dec ade and by 2005-6 it is estimated that the UK Treasury was losing £4.5m per annum through the fraud. It is oft en orchestrated by criminal operators using high value goods or services and the activity started in the communications and computer industries. Why is it spreading to the energy sector? In order to counter the fraud, HM Revenue & Customs changed the way VAT was paid to them on high risk goods in the electronics industry, creating a system where the customer paid the VAT on the sale directly to HM Revenue & Customs instead of paying VAT to the seller, thus depriving the seller the opportunity to steal the VAT.

Later, in 2009 evidence emerged that missing trader fraud had spread to trading in emissions allowances. In an attempt to block this, from 31 July 2009 regu lations were introduced to take trading in emissions allowances outside the VAT system. From 1 November this has been taken a step further and the special VAT accounting arrangements used in the electronics industry where the purchaser pays the VAT directly to HM Revenue & Customs will also extend to trading in emissions allowances.

For a little while now energy exchanges have been tightening their rules and processes in the hope of minimising instances of VAT fraud being committed by their members. However, it has been becoming clear over recent months that fraudsters have been targeting European OTC wholesale gas and electricity markets, which enjoy many of the same characteristics of the emissions market.

How can I recognise it?

Experience in other industry sectors suggests the following may be indicators of a possible missing trader fraud.

  • The trader may be new to the market and have a poor knowledge of the market
  • An approach may be unsolicited
  • The price offered undercuts the market or offers a guaranteed profit
  • Payment may be requested to a third party, possibly based offshore