The corporate income tax is levied on the profits of global corporations, public enterprises and unincorporated resident in the United Kingdom associations (Loretz, 2008). Non-resident companies, in turn, will pay the income tax on the profits they have made in the UK. Taxable income includes operating income, investment income and capital gains, less various deductions. Operating losses may be carried forward and deducted from the previous profits during this period or carried forward indefinitely to future fiscal years.
The standard rate of corporation tax is 30%, with a reduced rate of 19% applies to less than £300,000 profit (small business rate) (Crawford & Freedman, 2010). Companies whose earnings are between £ 300,000 and £ 1.5 million benefit from a reduction in the standard rate system, under which a 32.75% effective tax rate is applied to marginal profits beyond £ 300,000. This results in a gradual increase in the average tax rate to 30%.
Deductions for depreciation allow companies to deduct from their taxes an amount equal to the consumption of fixed capital (i.e. depreciation of fixed assets) resulting from their operations. Depreciation allowances can be made during the year of maturity subtracted from future profits, or carried up to three years back. The applicable depreciation rates differ depending on the type of asset:
· Investment in equipment can be depreciated on a declining balance rate of 25%. The goods to long life can be depreciated at a rate of 6%. A higher rate of 40% is applicable for the first year investment medium-sized enterprises and 50% for small businesses.
· Investment in industrial buildings and hotels are subject to straight-line depreciation rate of 4% per year.
· Investments in commercial buildings can be depreciated.
· Investments in intangible assets are amortized on a straight line, for which the Company may at its discretion apply the depreciation rate or a rate of 4%.
· Investments in equipment and buildings for research and development (R & D) have a more generous, since under treatment amortization of R & D plan, they can all be deducted from taxable income immediately
VAT stands for Value Added Tax. It is primarily a tax on sales, specifically a tax on the value added by the company, i.e. the difference between the amount of goods and services and the amount of goods and services purchased by enterprise (Cnossen, 1990). It is an indirect tax as it is for the company to collect the VAT it should be remitted to the state. Finally, it is a tax on consumption, since striking individual spending. In 1954, France was the first country to introduce VAT in its tax system, although the original idea of the VAT scheme had been invented in the 1920s by a German businessman, Wilhelm von Siemens, the concept was subsequently picked up and implemented by a French, Mauritius laurels. This is indeed the inventor of the VAT as a general consumption tax mechanism.
Despite its imperfections, the VAT tax is reliable, and takes a leading role in the state budget. That is why this tax was shortly after its invention becomes a success. In 1989, forty-eight countries, particularly in Western Europe and South America have adopted TVA25. On the one hand the development of the European Union has encouraged the expansion of VAT in Europe since the introduction of a VAT system was a condition of membership in the European Economic Community. On the other hand the support of the International Monetary Fund, in the years following, has spread the VAT in more than 140 countries. The only notable exception being the United States which is insensitive to the charms of this tax, preferring the "Sales-Tax” system.
While it is true that the inherent characteristics that limit opportunities for tax evasion and fraud, VAT is not, however, at present, a tax that remains flawless. Attempts to avoid paying this tax or obtain payment of false tax credits are also as old as the VAT itself (Smith, 2007) and illegal profits in this way are sometimes very important. It is also remarkable that these scams are becoming more sophisticated and ingenious, constantly adapting to changes in VAT. Therefore, there is no doubt that the development of VAT fraud is a tangible problem.
There are many ways to defraud the VAT. In most cases the fraud is only to evade the payment of tax. But weaknesses specific to this indirect tax also allow the development of a fraud with far more important consequences. Then it is creating a false tax credit on the Treasury, and thus achieves illegal profits at the expense of the state. Fraudsters, thus, enrich themselves at the expense of the company. These frauds are often the work of true crime networks mastering perfectly the tax rules, and the money raised can help the financing of criminal activities.
The current VAT systems suffer from many flaws that allow a chance for the fraudsters. In a society where tax evasion is sometimes due to "competition" it is not surprising that at the birth of this new tax, ingenious minds have tried to use the mechanisms of VAT to make fraudulent profits. The tax administration has always fought against VAT fraud with more or less success. But since 1993 and the establishment of a single market within the European Union, the VAT fraud took a novella extent with the development of carousel fraud. For if the VAT fraud has always existed, Carousel fraud is recent and has catastrophic consequences for state budgets.
The purpose of this paper is to explain the vulnerabilities of UK’s law which makes fraud in VAT and Carousal fraud possible. This research study also discusses the present weaknesses in Her Majesty Revenues and Customs (HMRC) due to which fraudsters can easily manipulate the law. This study also suggests the prevention strategies for Carousal fraud and how they can be implemented into HMRC to improve the situation.
· To discuss the nature of VAT frauds, especially the Carousal Fraud
· To identify the weaknesses in the system of Her Majesty Revenues and Customs (HMRC) which make the VAT fraud possible
· To describe and explain the prevention strategy to avoid fraudulent practices in VAT
· What is Value Added Tax (VAT) and why fraudulent practices are so common in VAT?
· What is Carousal Fraud?
· What are the weaknesses in HMRC which makes Carousal Fraud possible?
· What is the best prevention strategy to improve the situation?
Fraud is a dishonest act done with intent to deceive in contravention of the law or regulations. As for tax evasion, it is done to escape the tax by improper means, i.e. by processes or manipulations that the law will suppress (Alm & McCallin, 1990). It is then possible to propose the following definition: VAT fraud is an intentional act that can be characterized by the use of this specific tax mechanism to avoid paying tax or benefit a false claim against the tax authorities (Her Majesty Customs and Excise, 2004). It is to divert the tax rules by immoral methods to evade tax or to make illegal profits.
The VAT fraud is a breach of the social contract because it is defrauded by some is paid by others. Therefore, taxpayers no longer participate in fair expenses of the company way: it is a violation of the principle of fair taxation. It is also quite ironic that that tax fraud is definitely an offender which receives the greatest indulgence from the general public. However, the VAT fraud, or more broadly tax evasion is a scourge for all society. By reducing state revenues it diminished the funding of public service, so important for the development of the community. Each fraudulent profit is thus achieved at the expense of the state. Every citizen is then direct victim of tax fraud. This is why the issue of the fight against VAT fraud is crucial. For all these reasons, the VAT fraud is now a fascinating question that it seems essential to provide solutions.
The VAT fraud is the fraudulent use of the VAT rules so as not to repay the tax due to the State or to receive a fictitious claim against the State. Therefore, in order to understand the mechanism of VAT fraud, it is necessary to expose the schemes of such tax. The rules may vary depending on the nature of the operation performed by the subject, it is necessary to distinguish whether the operation is not an international character. It is therefore necessary to introduce rules for internal operations, and those applicable to intra-Community supplies and acquisitions (Bird & Gendron, 2007). Fraudsters take advantage of weaknesses in fact the mechanism of VAT both internally and within the framework of intra-Community trade in goods level. Although the VAT frauds are more "classic" and the most common but are mainly implemented in operations taking place exclusively in the country since 1993.
The establishment of the single market paved the way for developing more complex fraud, i.e. the "Carousel" fraud. Carousel fraud is taking advantage of the principle of exemption for supplies in the state of the seller, it allows fraudsters to make very large profits and is still very difficult to detect. Carousel fraud is a real problem for the state, as its effectiveness is formidable (Keen & Smith, 2006). Since fraud diverts VAT rules, we must discuss the VAT regimes applicable to internal operations and community activities before continuing on the analysis of the development of various forms of fraud.
Knowing the tax regime is essential to understand the mechanisms of fraudulent schemes. The scope of VAT is very wide, although some operations are, however, exempt from tax. When the mechanism of tax law, it is partly based on the system of payment by instalments. The subject and have a right to deduct. They attributed the VAT paid on the tax collected. Therefore, the tax is not a burden for businesses subject to VAT. The difference between the tax collected and input tax is in turn, donated to the state (Schenk & Oldman, 2007).
For a transaction to be taxable, it must have been made by a taxable person acting as such. The economic activities covered by the provisions relating to the tax on value added are defined very broadly as comprising all activities of producers, traders or service providers, agricultural and mining activities and those of liberal or similar professions. In fact, the condition for the exercise of an economic activity is most often filled in the presence of a business professional, so that excludes private transactions and those in which the subject will not be as such (Terra, 2007).
VAT is a tax on instalments; it is calculated on the selling price of the good or service while the taxpayer may deduct the tax charged by the person who preceded the circuit of production or distribution (Williams, 1996). Thus the calculation of the VAT payable by the company during a period, usually a month, is in two parts: one must calculate the gross tax payable before determining the deductible VAT. But the VAT scheme, simple in theory, suffers from several weaknesses. It was on the basis of the inherent mechanism of VAT law that different VAT fraud weaknesses are built. The VAT liability is the tax that is collected by a taxable person from his clients. So we must distinguish the VAT payable by the deductible VAT: the first is the tax collected downstream by a business subject, the amount is repaid to the Treasury. The second is the input tax paid by a taxable entity on its suppliers or providers (Cnossen, 2010). This is being attributed to the amount of VAT paid to the state to be reimbursed by the Treasury. The calculation of VAT payable is a very simple operation as it is to apply a VAT rate of the tax base (B). But it should be determined before the event and the chargeability of VAT (A).
For deliveries of goods made and chargeability coincide, it is the date of transfer of ownership of the property. No matter if the property is not yet paid, in which case the provider is ahead of VAT. Indeed, the fact is the generator run time of service, while the due date is the day of receipt of the price of services rendered (Crawford et al, 2010). The amount of tax payable resulting from the application of specific tax rate for the operation of the tax base. The tax base is made for the supply of goods, services and intra-Community acquisitions, all monies, securities, goods or services received or receivable by the supplier or service in exchange for these operations from the purchaser, the customer or a third party, including subsidies directly linked to the price of these operations (Crawford et al, 2010).
VAT, like all other taxes, is territorial application, i.e. the tax is payable only when the operation is performed on the national territory. These rules essentially the result of territoriality Community provisions harmonized national legislation. It is therefore in the study of territoriality of VAT to determine attachment of various operations to territory. It should be noted the VAT rules applicable to intra-Community trade because it is within this framework that many frauds emerged. This is particularly the case of carousel fraud, which takes advantage of flaws in the current EU system of taxation for the purchase of goods and services in cross-border exemption (Balcerowicz, 2007).
Since the birth of the European Single Market on 1 January 1993, the rules applicable to transactions between member states of the European Union is no longer in the rules applicable to transactions made with a state located off the European Union (Gebauer et al, 2003). Currently, the transitional arrangements for the taxation of intra-Community transactions subject provides for the payment of tax in the country of the buyer. On services performed between taxable, taxation takes place in principle in the State of the lessee (Crawford et al, 2010). The system of intra-Community transactions of goods depends on whether the delivery is made to an identified subject or individual. However, it is more useful to focus on the regime applicable to taxable because it is in the context of cross-border transactions subject that fraud has grown.
It is remarkable that the VAT fraud takes advantage of weaknesses in the tax system, especially in the VAT regime applicable to domestic transactions subject to tax, but also on the intra-Community transactions as fraudsters do not fail to exploit the weaknesses inherent in each of these two regimes. It must be borne in mind that VAT fraud is not only a national problem. Indeed, the creation of the single European market in 1993 abolishing tax frontiers opened up new opportunities for fraud. For the method of taxing intra-Community trade today based on a transient and incomplete system for the implementation of large scale fraud where fraudsters and accomplices share huge profits circuits. Deliveries of goods between Member States are exempted from tax effect in the State of departure, and give rise to reverse in the country of the purchaser. Therefore, in parallel with VAT fraud taking advantage of weaknesses in the VAT rules governing purely internal operations, it has developed a more complex form of fraud exploiting the weaknesses of the transitional arrangements for the taxation of intra-Community transactions.
This fraud is appointed by the specialists of "carousel fraud". It is to divert the VAT rules applicable to Community trade, making intra-Community acquisitions tax exemption without paying VAT to the Treasury (Ainsworth, 2006). This tax is very effective because it requires no claim to the state. Indeed the operator resells, charging VAT, the goods acquired tax exemption. Fraudulent gain is the difference between the cost of assets acquired and their tax exemption for re-sales price including tax. It is clear from this analysis that fraudsters adapt constantly to changing the tax system, and exploit the smallest flaws.
Since 2005, there is a Community trade of emission allowances that allows businesses to make "rights to pollute" transactions. But in recent years, several cases of Carousels fraud were found in this market. It turns out very attractive to fraudsters, since traded goods are intangible and therefore taxable in the State of the lessee to the reverse charge mechanism. Fraudsters then benefit from reverse to make illegal profits at the expense of the state. But the main interest of this fraud is the nature of good support fraud. Indeed, it is immaterial; it requires no transport logistics which optimizes performance. The recent development of carousel fraud in the European market for pollution rights perfectly expresses the extraordinary inventiveness sometimes shown in fraud crimes. The ingenuity of fraudsters is very profitable here, as it would have reported to date more than 5 billion Euros (Caridi & Passerini, 2001).
There are different forms of VAT fraud that can be grouped into three categories: Classic VAT frauds, frauds consist of circuits of false invoices and finally Carousel fraud (Pashev, 2007). VAT Classical Fraud is called so because it has been the creation of the VAT, and is found in all countries using this type of tax. The objective is to evade paying what is owed to the state. It relates generally to small amounts, and the result of "failure" to report certain business transactions; however, it represents only a small proportion of the total amount of VAT fraud. The largest part of this amount is made up of fewer but more profitable forms of fraud.
Classical VAT frauds are characterized by their simplicity, and thus remain very accessible to a wide audience. Most of the time they are to disregard the rules of taxation to reduce the total amount of VAT due to the Treasury. Such frauds may also include the use of the existence of multiple VAT rates, underestimating the rate shown on the sales invoices to underestimate the VAT payable to the Treasury. Indeed companies conducting transactions subject to different rates should report the revenues they realize by category of tax rates. The game of fraud is to use the existence of these different VAT rates so that a transaction is taxed at a lower rate than that normally applicable (Crocker & Slemrod, 2005).
The provisions of deduction allow taxable persons to deduct the input tax credit received on the downstream. This deduction is materialized by a tax credit of the company in the state. The objective of fraudsters is to use the rules of right of deduction in order to increase the existing tax credit or create an amount of VAT credit illegally (Das-Gupta & Gang, 2003). For this, they sometimes produce bogus invoices or bills. Assuming the fictitious invoice, delivery of a good or the service has never occurred. The invoice is false because it mentions a non-existent transaction (Das-Gupta & Gang, 2003). In the second case, the bill of convenience, the reality of the transaction is not disputed, but the actual service provider is a third party, i.e. a person other than the issuer of the invoice. In these cases, the fraud is more to just evade taxes voluntarily. According to Das-Gupta & Gang (2003), it is for fraudsters to get rich by creating a notional input tax credit at the expense of the state. This is the nature of VAT that allows the diversion of tax.
The pattern of these frauds is very simple. Since the invoice is the basic document to qualify for the right to deduct input VAT, simply make a false invoice to create in favour of the purchaser a tax credit against the State equivalent to the amount of VAT on the invoice. In fact, the mention of VAT on an invoice entitles in principle in the latter to a deduction of the same amount. As for the fictional claim, the provider then charges the amount of tax he owes the Treasury or requests the State reimbursement. False invoices that do not match any execution of service delivery or deliveries of goods take the name of factious bills. The interest of these false invoices is to enjoy the deduction system to create a false VAT credit on the state that can be liquidated either by charging the VAT due or requesting a refund.Slemrod & Yitzhaki (2000) are of the opinion that the mechanism of VAT fraud with fictitious invoice exploits vulnerabilities specific to this tax. These produce a VAT invoice but has no counterpart in term supply of goods or provision of services actually performed. Its mechanism is to divert the system of payment by instalments of the VAT is the establishment by the taxable invoice indicating the amount of tax for which it is liable. These bills when they are legal justify the existence of the VAT receivable available to the purchaser due to the payment of input tax. The purchaser may then deduct the amount of the input tax amount of the tax imposed by the state. This technique creates an imaginary VAT credit resulting in the deduction or refund of VAT shown on the false invoice. There are several types of frauds resulting in the provision of a bill that is a benefit or deliveries actually made. In all these cases of fraud, it is issuing a VAT invoice so that it is not legally authorized to be included. Thus, the assumption that the operator provides a VAT invoice when there is not liable because it was not legally opted for payment of VAT.
The "carousel" fraud is a mechanism for VAT fraud that can take many forms, more or less complex. It involves at least two member countries of the European Union and often a third located outside the Community. One of the simplest schemes requires three actors. Company book and goods to Company B moved to UK from France. It is an intra-Community supply of goods is exempt from VAT in the country of departure. Once the goods arrived in UK, Company B sells to firm C. Company B UK VAT invoice to C, while C gets deducted or repayment of VAT that was charged by B. It then disappears without paying the UK the VAT it has charged. The loop closes when the firm sells the goods to C A and ships the goods from UK to France. Company C in turn generates an intra-Community supply of goods is exempt from VAT in UK. There is thus a double loss for the state, which not only does not collect the tax charged by B, but reimburses C (Grandcolas, 2008). This type of fraud has a limited lifespan, usually about 2 years. It often involves the area of telephony and electronic components. These are highly demanded goods represent important amounts. These frauds are committed by organized networks with connections abroad.