Financial Administration

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Carousel fraud

“Carousel fraud” or also “missing trader fraud” is a very significant part of the value added tax fraud. Organized groups usually use VAT exemption on intra community supply of goods.

The term “missing trader” refers to the fact that the trader disappears and the VAT disappears with him - unpaid. That is why the missing traders are called “strawpersons”. The term “carousel fraud” expresses more complex type of fraud, where the goods are traded among VAT payers, whereas someplace in the chain the VAT is neither declared nor paid and the respective economic subject ceases to exist or becomes untraceable.

How does the carousel fraud work? FINFO explains in this video:

The carousel principle

The basic “carousel” scheme consists of three tax subjects:

  • a strawperson (missing trader),
  • a company (broker),
  • an EU payer.

The obligation to pay the VAT arises for the trader who acquires goods from another Member State and who wants to sell them domestically. The strawperson sells the goods with the VAT. The company, that buys the goods, pays the VAT to the strawperson and in turn sells the goods to another Member State in the EU (without the VAT). The company then claims an excessive deduction. In that moment the strawperson vanishes off the market (hiding from the Tax Office) without paying the VAT. The Financial Administration has to grant the excessive deduction claim, unless a complicity in the fraud is proved.

Structure of the organized group performing carousel fraud

Carousel fraud composed of three tax subjects would be very easy to reveal. Therefore, the organized groups deploy so many strawpersons, that the structure of a fraud remains disguised. The carousel may have tens to hundreds of participants. Tax subjects keep constantly vanishing while new ones are emerging, therefore uncovering of the entire chain can take several years.

Impacts of carousel fraud

  • creates unlawful competitive advantages
  • extracting money from the state = tunnelling of the VAT sytem

New tools of the Financial Administration

  • Securing orders and accompanying measures
  • Reverse-charge
  • Organizational measures of the Financial Administration (“Tax Cobra” team, “Assistance to Prague” project, countrywide controlling competencies)
  • VAT Control Statement