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Vat Fraud and the Clothing-Footwear Industry
Feature: 17/5/2010

he VAT return always has the potential to bring anxiety or uncertainty. But such feelings can be multiplied if HM Revenue and Customs suspect that your company has been involved in VAT fraud.

The trader may be completely innocent of wrongdoing or involved unknowingly. There may not even turn out to be any actual fraud. But if there is even a suspicion of fraud then HMRC may still not deduct a trader’s VAT input tax from their declared output tax. 


Such action can cripple the cash flow of a company. And with the clothing industry coming under close scrutiny from the taxman, it is vital that traders in this sector are fully aware of the potential pitfalls.

 

The clothing industry is a sector that is attractive to VAT fraudsters for three reasons:
Clothing is an area of business that has always involved the importing and exporting of goods on a large scale. And import-export offers the fraudster the greatest opportunity for VAT fraud.
Clothing and footwear are often high-value goods, so a shipping container full of garments can have a much higher net worth than one full of, for example, potatoes. The higher net worth then the bigger the amount of VAT involved – meaning the bigger potential gain for fraudsters.
Some other imported items favoured by fraudsters (mobile phones, for example) are now subject to tighter, anti-fraud VAT regulations, which has made clothing a more attractive option to criminals.

Missing Trader Intra-Community Fraud (MTIC) is the fraud most commonly associated with clothing. It cost the UK economy between £2-£3bn in the tax year ending March 2006. MTIC involves three steps:
Criminals importing the clothing or footwear from a country within the European Union, so there is no VAT chargeable when the goods are brought into UK.
They sell the goods onto a trader in the UK, charging VAT. That trader may sell the goods onto another trader and, at some stage, a UK-based trader will re-export the goods back to a EU country and claim back the VAT they paid out on the purchase.
But by then the original importer has disappeared without accounting for the VAT he collected when first selling the goods.

MTIC is also known as carousel fraud, as the same goods are moved around and around between traders and countries. Customs have had to pay back VAT when the goods are exported. But they never collected any VAT when the goods were imported.


Customs will investigate when such a fraud becomes apparent. But on many occasions the fraudsters have fled the country. Often the only people left who can be prosecuted are traders who innocently bought goods involved in a carousel fraud and then sold them on. Fraudsters will often sell the goods between themselves but many are happy to use innocent traders in their fraudulent chain of business as it helps disguise the fraud.


This can leave an innocent trader struggling to prove their innocence while facing both:
A lengthy investigation that could lead to criminal charges, financial penalties and bad publicity.
A refusal by HMRC to deduct the trader’s input VAT from their declared output tax, causing cash flow problems.

So what can those in the garment and footwear industries do to avoid being caught in such a situation? The simple answer is to be very careful about how you do business and the people you do it with. 


A 2009 court case judge said that the trader has to take “every precaution reasonably required’’. Reasonable precautions can include checking out a potential supplier’s VAT number to ensure it has not been hijacked. Checking out suppliers and purchasers with credit agencies and querying deals that offer instant or unusually high profits are actions that a court would expect a trader to have taken as precautions against dealing with fraudsters. The emphasis is on the HMRC to prove the trader must have had the ability to know a fraud was being perpetrated. Anything a trader can produce to prove he took precautions will aid his case.


If a trader does come under HMRC investigation for VAT fraud, it is crucial to seek immediate legal advice from a specialist experienced in such cases. A company’s regular solicitor may be the most convenient option but their inexperience in such fields can mean they miss early opportunities to counter the HMRC’s allegations, thus failing to prevent a lengthy and damaging investigation. There are currently around 600 cases waiting to be heard involving traders appealing against having their VAT withheld over fraud allegations. The scale and the seriousness of the issue demands that any trader involved acts immediately to gain the right advice.

 

Rahman Ravelli is one of the fastest-rising firms specialising in fraud, serious crime and business crime. www.rahmanravelli.co.uk

Aziz Rahman

 

The clothing industry is a sector that is attractive to VAT fraudsters

Author: Catherine Christie
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