VAT Fraud

VAT is the sales tax paid in the UK - 17.5% is added to the price of the product before sale.

The UK has been hit by a fraud worth £8.4bn - according to Eurocanet, a monitoring service. That's equivalent to a 1% rise in income tax.

The fraud succeeds because exporters are able to claim back the VAT on products exported. So, they set up an import company which imports the products and 'sells' them to an exporter. The exporter adds on the VAT figure for retail - but instead of selling the product within the UK, the products are exported (often back to the company they bought it from) - and the VAT is claimed back form the government through the normal accounting channels.

The exporter then closes his business down so there is no chance of the government reclaiming the VAT it has paid out.

Then, of course, a new company is set up and the cycle is repeated.

You can see more details here on a BBC Panorama programme that covered the issue in some depth:

http://news.bbc.co.uk/1/hi/programmes/panorama/default.stm

We will look at this again in Module 5 when we study the broader issues of corporate governance and business ethics.