EU VAT fraud spreading to UK pharmaceutical industry

The UK’s tax authority, HMRC, is stepping-up its investigations into the emergence of EU VAT fraud in the pharmaceutical and medical supplies industry. This type of fraud, which is based around gaps in the EU VAT regime, has cost member states billions in lost revenues in other sectors over the past 10 years, according to European Commission.

There have already been successful prosecutions of EU VAT fraudsters in the UK in recent months, including schemes targeting the NHS. This has prompted HMRC’s policy and criminal review teams to start reviews across the industry’s supply chains. In particular, they appear to target frauds around unlicensed drugs and food supplements.

The VAT fraud schemes, known as ‘missing trader fraud’, and often run by highly organised criminal gangs, exploit the tax rules of goods moving across EU state borders. In many instances, fake companies buy goods in a country and are charged purchase VAT. They then claim they are selling the goods in another EU country, so do not charge any sales VAT. This entitles them to reclaim the purchase VAT as a refund.

These fraudsters actually sell the goods locally, charging sales VAT, but do not declare or pay the VAT to the tax authorities. The perpetrators then disappear, keeping the sales VAT and VAT refunds. In a more complex variation, whole chains of fake companies are set up around Europe so the fraud can be carried out repeatedly on the same goods.

The fraud schemes are generally focused on small, high-value goods, including those that can be easily shipped without proper detection. This includes: mobile phones, computer chips, tablets, PCs, carbon trading licenses and precious metals.

To help reduce missing trader fraud, the European Commission permitted member states to apply zero VAT on industry sectors susceptible to missing trader fraud. This is known as the ‘domestic reverse charge’. It has significantly reduced the opportunities for fraud, but has encouraged criminal gangs to search out new sectors including the pharmaceutical industry.

The UK is playing catch-up with these fraudsters and but is making strong efforts in this area.  The EU and UK closed off the early attempts at fraud in the wholesale electricity markets last year, but it now appears the fraud has moved on to pharmaceutical and health supplies.