VAT fraud is one of the most common forms of tax evasion in the UK, and it continues to cost the government billions of pounds each year. In 2022-23 alone, HMRC estimated that £5.5 billion was lost due to VAT fraud. With increasing regulations and sophisticated detection methods, the UK government is tightening its efforts to combat VAT fraud. This blog will help you understand the scope of VAT fraud, the penalties for engaging in it, and how to report suspected fraudulent activity.
Understanding VAT Tax Fraud
Before diving into VAT fraud, it’s essential to understand what VAT is and how it works. VAT is a tax added to the sale of goods and services. Businesses are required to charge VAT on sales and may reclaim VAT on purchases, effectively passing on the cost of VAT to the consumer.
In the UK, businesses with a taxable turnover of over £90,000 are required to register for VAT, while those with turnover below £88,000 can choose whether to register voluntarily. Once registered, businesses must adhere to several obligations:
- Charge the correct VAT rate
- Submit accurate VAT returns
- Pay VAT to HMRC on time
- Maintain proper records
VAT fraud occurs when businesses underreport sales, inflate purchases, or fail to remit collected VAT to HMRC, which undermines public finances and unfairly distorts market competition.
How to Detect VAT Fraud
Certain behaviours raise red flags for VAT fraud and can trigger investigations by HMRC. These signs include:
- Failure to register for VAT when required
- Using cash for most transactions
- Receiving payments under different names or addresses
- Using invalid or incorrect VAT numbers
- Reporting VAT fraud anonymously or confidentially
When HMRC detects suspicious activities, investigations may follow, leading to penalties or even criminal charges. Given the complexity and time-consuming nature of these investigations, it’s crucial to consult with professionals who specialize in VAT fraud to ensure full compliance.
Types of VAT Frauds
Several common types of VAT fraud occur in 2025, each designed to exploit weaknesses in the VAT system. Some of the most notable types include:
Carousel Fraud (Missing Trader Intra-Community Fraud – MTIC)
Carousel fraud, or Missing Trader Intra-Community (MTIC) fraud, is one of the most sophisticated VAT fraud schemes. It involves businesses exploiting cross-border trade within the EU. A “missing trader” imports goods VAT-free from another EU country and sells them domestically, collecting VAT from customers but not remitting it to HMRC. The business disappears, leaving unpaid VAT behind, while other businesses in the supply chain reclaim VAT they never paid.
HMRC combats this fraud by using real-time transaction reporting and monitoring under the Central Electronic System of Payment Information (CESOP). Businesses engaged in international trade must ensure full compliance to avoid being unintentionally caught in MTIC schemes.
Missing Trader Fraud
Missing trader fraud is similar to carousel fraud, but it occurs domestically rather than across borders. Fraudsters charge VAT on sales but fail to remit the VAT to HMRC before shutting down their business to avoid detection. To combat this, HMRC has introduced the VAT reverse charge mechanism for high-risk sectors like electronics and construction, shifting the VAT responsibility to the customer rather than the supplier.
E-Commerce VAT Fraud
With the rise of online shopping, e-commerce VAT fraud has become increasingly prevalent. Fraudsters often exploit online platforms by failing to charge or pay VAT on sales, misrepresenting their location, or underreporting sales. Common tactics include selling goods from overseas warehouses while falsely claiming UK VAT registration, offering VAT-free prices, or splitting large sales into smaller transactions to stay below VAT thresholds.
HMRC has responded by imposing stricter regulations on platforms like Amazon and eBay, requiring them to collect and remit VAT on behalf of overseas sellers.
False Invoicing and Documentation
False invoicing involves businesses creating fake or inflated invoices to evade VAT payments. This can include issuing invoices for non-existent transactions or submitting duplicate invoices to claim multiple VAT refunds. To prevent this, HMRC uses Making Tax Digital (MTD) to ensure that businesses submit accurate digital VAT reports. False invoicing is a criminal offence that can lead to severe penalties and prosecution.
Suppression of Sales (Zapper Fraud)
Zapper fraud occurs when businesses deliberately underreport sales to reduce VAT liabilities. This is common in cash-heavy industries such as hospitality and retail, where businesses use hidden software to delete sales records or fail to report cash transactions. HMRC has introduced tougher regulations for point-of-sale systems to ensure transparent record-keeping.
VAT Fraud Penalties
VAT fraud is treated as a serious offence, and HMRC imposes severe penalties for businesses caught engaging in fraudulent activities. These penalties can include:
- Civil Penalties: Up to 100% of the tax evaded, plus interest
- Criminal Prosecution: Unlimited fines or imprisonment for serious fraud
- Business Closure: HMRC has the authority to shut down businesses and disqualify directors
- Confiscation of Assets: Under the Proceeds of Crime Act, authorities can seize assets gained through fraud
- Tax Audits: HMRC may conduct full tax investigations, leading to additional penalties
Additionally, businesses that fail to comply with VAT regulations face standard VAT penalties, including late payment fines and the VAT penalty points system.
VAT Late Payment Penalty
Late VAT payments incur penalties depending on the number of days overdue:
- 1 to 15 days: No penalty if you arrange a Time to Pay (TTP) agreement
- 16 to 30 days: 2% penalty on the unpaid VAT
- 31+ days: 4% penalty plus daily interest at the Bank of England base rate + 2.5%
VAT Penalty Points System
The VAT penalty points system applies to businesses that submit late VAT returns. For each late submission, you receive penalty points. Once you hit the threshold, you’ll incur a £200 fixed penalty. The thresholds depend on your VAT return frequency:
- Annual submissions: 2 points
- Quarterly submissions: 4 points
- Monthly submissions: 5 points
Failure to meet the filing deadlines can result in additional penalties, so it’s crucial to stay on top of your VAT obligations.
Reporting VAT Fraud to HMRC
If you suspect VAT fraud, it’s essential to report it to HMRC. There are several ways to report fraud confidentially:
- HMRC’s Online Fraud Reporting Tool: Available via GOV.UK
- HMRC Fraud Hotline: Call 0800 788 887 to report suspicions anonymously
- Postal Report: Send details to HMRC’s Fraud Investigation Service
When reporting, include as much information as possible, such as the business name, VAT number, and details of fraudulent activities.
Conclusion
VAT fraud is a significant issue for both the government and legitimate businesses. Understanding the different types of VAT fraud, the penalties involved, and how to report suspicious activity can help protect your business and ensure you stay compliant with HMRC regulations. If you’re unsure about your VAT responsibilities, consulting with a tax professional can help you navigate the complexities of VAT law and avoid penalties.
