Buyers of wholesale electricity and natural gas on UK trading platforms are advised to be on high alert for instances of “missing trader” fraud over coming months, ahead of a new measure that will switch VAT charges from energy suppliers to purchasers.
The issue of fraud in the UK markets has been subject to increased focus recently following reports that HM Revenue & Customs (HMRC) has allegedly detected VAT losses arising from missing trader intra-community (MTIC) fraud in the wholesale gas and power markets.
A note published by audit and tax specialists Deloitte last month claimed that HMRC has launched an investigation after registering the tax losses.
And the threat of fraud in the UK gas and power markets appears to have reached new levels, following HMRC’s decision to change the procedure on VAT charges in last month’s budget, targeted at tackling fraud.
Helen Thompson, partner at Deloitte in indirect taxes, said HMRC’s decision to reverse the charges and place the liability for VAT payment with the purchaser rather than the supplier indicates an admission that there is an imminent threat to market participants from fraud.
“The market should be on high alert as the budget announcement is a warning that the threat is real,” Thompson said.
The reversal of VAT charges will take effect following an informal consultation with the industry to determine a convenient date for its introduction, taking account of logistical issues.
Sources suggest the change could come into force as early as July, although HMRC has refused to put a time-frame on it. “Once a statutory instrument has been agreed, HMRC will publish a copy with details of when it will come into effect,” a spokesman said on Thursday.
The potential for fraud on energy markets has been a live issue for several years. Europol, the European law enforcement agency, investigated the possibility of fraud on the carbon market in 2010 while the Council of European Energy Regulators (CEER) has been actively engaged in attempts to prevent fraud from infiltrating the markets ( see EDEM 11 October 2011 ).
Although the advent of new processes and increased resources means companies are better equipped to counter fraud than a few years back, Don Mavin, partner at tax specialists Mavin and Co., emphasises that fraudsters have also refined and sharpened their methods over time.
“Since the instance of mobile telecoms fraud offshore, it was expected that the fraudsters would ease themselves gently into the gas and power sectors.
“The method developed has been to take little and often, rather than extract amounts that are glaringly obvious. They remain below radar to give the impression of an established and authentic business.”
Although it could be tempting for traders to adopt the attitude that it is only the perpetrators of fraud that will be penalised, experts warn that HMRC’s approach is toughening towards attributing responsibility to counterparties at the wrong end of fraud.
“What we’ve seen recently is that HMRC is taking the line that ‘you should have realised it’s too good to be true’,” said Mavin, adding that the existence of MTIC fraud for over 15 years means traders no longer have an excuse to plead ignorance to the signs of fraud.
Mavin argues a precedent set by the Kittel principle intervention case from European law means the division between an active knowledge of fraud, and a constructive knowledge of fraud in which a participant should have known of the risks, has eroded.
Both Thompson and Mavin agree that HMRC will pursue all avenues to recoup undeclared tax where possible and often this means targeting the purchaser.
“It’s still a loss to HMRC because the VAT disappears. Customs goes after anyone else in the supply chain, the soft target, whether they’ve bought from or sold to the missing trader,” Mavin said.
And according to Thompson, companies should not look to HMRC to provide a black and white prospectus detailing instances where they would or would not be liable to repay the VAT and additional penalties.
“HMRC has deliberately not published a checklist as this implies a guarantee on the issue. They have shied away from it as they want to keep people alert and using their judgement,” Thompson said.
Penalties for companies caught interacting with MTIC fraudsters extend beyond the simple repayment of VAT to HMRC, with guilty parties subject to additional fines ranging from 30% of the total VAT cost in cases of careless behaviour, to 70% in cases of deliberate activity to evade detection by tax authorities.
Penalties can be mitigated significantly depending on the behaviour of companies in breach of rules, with HMRC looking favourably upon the voluntary submission of information compared to cases where it detects evidence of malpractice.
“Our experience is that many boards of large companies do not want to litigate on this matter. Therefore co-operating with HMRC should stand the company in the best position to reduce the financial impact of penalties,” said Thompson.
Both Thompson and Mavin say the horizon in the battle to tackle fraud in the energy markets looks brighter, because the reversal of VAT charges will help to remove the attraction of committing fraud from the supply chain.
But Mavin sounds a note of warning to those at risk of letting their guard slip. “Where there is a sizeable volume and value of transactions and the possibility of VAT gain exists, it is guaranteed that someone will try to exploit it.” Henry Evans
What is MTIC fraud?
MTIC occurs when one counterparty buys a commodity from a country in which VAT charges do not apply and resells it to a customer domestically with VAT charges included but without notifying tax authorities
Situations where participants should be wary of MTIC fraud:
New entrants to the market
Unusual trading patterns by counterparties such as sharp increases in trading activity
Unusual requests made by one counterparty such as a request for the purchaser to sell on to another counterparty under the guarantee that they will receive a certain price for the commodity. “We have seen traders talk to one another in those terms,” says Thompson
Recommended procedures to counter potential MTIC:
Checks should be made on new entrants to the market but existing counterparties should also be monitored at regular intervals
Questioning the commercial reasons behind trades with the help of tax and risk advisers
Trader education to detect signs of MTIC
Data analytics that allow companies to monitor transactions after they occur