A Missing Trader Fraud (or Carousel Fraud) is a type of deception practiced across different jurisdictions, exploiting the Value Added Tax systems between those jurisdictions. The fraud is reliant on either reclaiming or failing to pay VAT due to a Government agency, and then vanishing with that duty. Value added tax (VAT) is similar to a sales tax in that it is levied at the time of the sale of goods and services. ...

Operation of the fraud

There is a description of the fraud in Federation of Technological Industries v Customs and Excise Commissioners [2004] EWCA Civ 1020. It can be paraphrased as follows:

The simplest type of missing trader fraud has one party to it. The fraudster, based for example in the UK, buys some goods from an EU supplier, VAT free. These goods tend to be small high value goods, typically electronics such as cellular telephones. The fraudster then sells the goods in a legal appearing manner, charging VAT to each customer. The fraudster does not, however, declare that VAT to the Government, and simply vanishes. So, if the market price for celluar telephones were £100 he would sell them at £100 either directly to the public, or to an unsuspecting third party. On that price he would add 17.5% VAT (£117.50). He then absconds with whatever legal profit he made on the telephones, plus 17.5% he should have paid over to the Government. Meanwhile, a third party in all innocence, reclaims that VAT from the Government. It suspects nothing, and does not lose out. If the fraudster sells directly to the public, he also charges £117.50 per telephone, however a consumer cannot reclaim that VAT, pays what appears to be a normal price for the telephone and suspects nothing about depriving the Government of £17.50.

The fraud becomes a carousel when the number of collusive parties increases. The carousel starts in the same way, in that a UK fraudster buys a consignment of goods (again for example cellular telephones) from another EU state, paying no VAT. Rather than selling to a third party, he sells to a co-conspirator, charging VAT to that conspirator. In turn that conspirator sells to another, again charging VAT. The first conspirator now reclaims the VAT it paid from the Government, and hands over the VAT it has collected. The new conspirator will repeat the procedure, and it may pass through several conspiratorial companies (called buffers) until it reaches the end of the chain. The last company does not sell to anyone in the UK, it instead re-exports the goods to (say) France, and does not charge VAT on that sale. He has, however paid VAT to the previous company, which he can now reclaim from the Government. In the interim the first company has not reported the first VAT it collected to the Government, so the Government cannot collect it. In other words, the cell phones have never been sold in the UK, and the last company in the chain has recovered the VAT on them from the Government. Meanwhile, further back in the carousel no VAT has been handed over to the Government.

These schemes appeal to fraudsters because little physical activity is required. Cell phones may arrive in a container at a port, be traded without moving, and then placed on a ship out of the country to be sold elsewhere. The chain is so long it takes the collection agency time to unravel it, by which time the perpetrators have vanished. It is also appealing, as the same cellular telephones cann be sent around the carousel again if they are re-imported. Each trip around nets the VAT value to the last company in the chain.

Cost of the fraud

In 2002-3 the agency that is now HM Revenue and Customs in the UK, put the cost to the UK alone at £1.65 and £2.64 billion in 2002/03.