VAT Fraud and VAT Penalties: An Overview

VAT is a significant source of revenue for the EU Member States and plays a crucial role in funding public services and infrastructure. However, VAT fraud has become a major concern for the EU, with the European Commission estimating that €93 billion of VAT revenue was lost in 2020 due to VAT fraud.

Because of this, the EU is now taking steps to combat it, most notably with the introduction of its VAT in the Digital Age (ViDA) proposals. The ViDA initiative will, for example, see a move to e-invoicing, which on its own is expected to help reduce VAT fraud by up to €11 billion a year.

Common types of VAT fraud

VAT fraud occurs when businesses/individuals manipulate the VAT system to avoid paying their taxes. It can be challenging to detect, though, as it often involves complex schemes and cross-border transactions. VAT fraud can take several forms, the most common of which are:

Carousel fraud

With carousel fraud goods are imported into one EU country VAT-free and then sold through a series of transactions across several countries before being re-exported VAT-free to the original country of import. At each step of the way, the traders involved charge VAT to their customers but fail to remit it to the relevant tax authority.

Missing Trader Intra-Community (MTIC) fraud

This type of fraud is similar to carousel fraud but involves a chain of transactions within the EU. The fraudsters will set up a network of companies that buy and sell goods across borders, charging VAT on the sale but then disappearing before they pay the tax to the government.

Import VAT fraud

Import VAT fraud involves importing goods into the EU from outside and falsely declaring a lower value for the goods to avoid paying the full amount of VAT. The goods are then sold on in the EU at a higher price, without paying the appropriate VAT.

Cross-border VAT fraud

This occurs when a company/individual sells goods or services online from one EU member state to another, but fails to declare and pay the VAT due in the country of consumption. Instead, the company collects VAT from its customers and pockets the money without remitting it to the relevant tax authority.

VAT evasion

VAT evasion can take many forms, such as the underreporting of sales, overreporting of expenses, or failure to register for VAT altogether. Some common methods of VAT evasion include falsifying invoices, manipulating sales records, and conducting transactions in cash to avoid leaving a paper trail.

VAT penalties for fraud

The consequences of VAT fraud are substantial. It results in a loss of revenue for the EU member states, distorts competition, and undermines the integrity of the VAT system. To combat this problem, the EU has introduced a range of measures, including better cooperation between tax authorities, enhanced risk assessment, and tougher penalties.

The penalties and fines for committing VAT fraud in the EU can vary depending on the specific circumstances of each case, including the severity of the offense, the amount of VAT involved, and the country in which the offense occurred. VAT fraud is typically investigated and prosecuted by national tax authorities in each member state. The penalties and fines for VAT fraud can include:

Administrative penalties

Penalties and fines are imposed by tax authorities for non-compliance with EU VAT rules, such as failure to register for VAT, failure to submit VAT returns, or failure to pay VAT owed. These VAT penalties can range from a fixed amount to a percentage of the VAT due.

Criminal penalties

In some cases, VAT fraud may be considered a criminal offense, particularly if it involves large sums of money or is part of an organized criminal scheme. Criminal penalties can include fines, imprisonment, or both.

Other penalties

Tax authorities may impose additional taxes and interest on the VAT due as a result of the VAT fraud. And businesses that repeatedly fail to comply with EU VAT laws are at risk of having their VAT registration suspended or canceled, which would prevent them from trading within the EU.

Stay VAT compliant

VAT fraud is taken very seriously in the EU, and offenders can face significant financial and legal consequences. In France, for example, if a person deliberately evades or attempts to evade VAT, the maximum penalty can be up to twice the amount of the VAT due, with a minimum of €1,500. In addition, the offender may be subject to a prison sentence of up to five years and a fine of up to €500,000.

To avoid VAT penalties for fraud, businesses must comply with VAT regulations and keep accurate records of their transactions. There is help availabe if you're having difficulty with your VAT obligations, though. For example, there are number of VAT schemes that allow you simplify the VAT compliance process. Ultimately, it’s essential that you understand EU VAT rules and seek professional advice when dealing with cross-border transactions.

Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.