Is "missing trader" scheme legal?

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Registering a company for “missing trader” scheme with the aim of defrauding VAT is pursued by law and can cause the beneficiary many problems if he develops this type of criminal activity.

Although a term “missing trader” may not sound too familiar to many clients, tax authorities are very aware of this scheme. The analogy of this term is quite accurate to define the real operations of companies that, as we will see more closely in the following paragraphs, are created to make intra-community purchases of large volume not subject to value added tax, sell the merchandise to one or several trading companies without paying the corresponding VAT and disappear or go missing when it is time to fiscal liquidation of taxes. That's how elusive these “missing trader” schemes are. In addition, by the general rule, the “missing trader” is part of an even more complex network of business structures dedicated to VAT frauds that are known as VAT carrousel frauds. Let's now see in detail what is the structure and functioning of this “missing trader” scheme and how the tax agencies fight to hunt them.

Structure of “missing trader” scheme 

As we described before in a generalized way, a “missing trader” is a scheme by the traders to defraud intra-community acquisitions, taking advantage of the fact that these purchases between the member countries of the European Union are not subject to VAT. The “missing trader” scheme does not involve a real business structure, nor does it have infrastructure or employees. Companies that use this scheme are "wet paper" companies registered under the name of insolvent frontmen to avoid criminal liability, which, as we have seen in some dismantled plot, have in some cases turned out to be homeless beggars used by the ideologues of these operations. The “missing trader” is often linked to the VAT carrousel fraud and criminal organizations that are behind it. The “missing trader” company has a very short life, following the circle from its creation, obtaining profits and closure before rendering the corresponding accounts with the tax agency, although in case of doing it, the tax agencies would have nothing to charge since there would be nothing in its possession. In this way, these companies and traders appear and disappear without rhyme or reason to profit from the public resources by not paying the taxes to which they are bounded by law. In addition these companies help the emergence of unfair competition within the sector in which they operate. By buying without VAT and saving the VAT passed on sales to “shell” companies these missing traders are able to sell at lower prices to the final consumer or a third company, and also request the refund of VAT paid. Faced with this reality, businesses that buy and sell legally supporting and reimbursing their VAT are displaced and even expelled from the market. However, sometimes we have seen that even this intra-community merchandise is fictitious, only real in the false invoices or in the empty boxes that missing traders place in circulation to give life to their fraudulent structure. 

Operation of “missing trader”

To understand how a “missing trader” scheme works, we should first explain the operation of intra-community transactions, because that is where the rationale for this scheme lies. Currently, in the European Union there is no fiscal harmonization or a single system in this matter. That is, each member state is the owner of the type of taxes that it considers appropriate according to its national tax policy. In this way, each country in the European Union imposes a different type and rate of VAT. Before this situation it is difficult to set a fair settlement system. Although we are guided by the Single European Act that stipulates a single market with free movement of goods between member states, intra-community transactions do not operate in the logical way we might think: the seller of the goods includes VAT on the invoice issued for the buyer; the seller pays his VAT in his country and the buyer requests the return in VAT. Obviously, this has not been put into practice because the net importing countries would end up returning an IVA for which they have not received any income as a counterpart, while the exporting countries would see their coffers increased without having to return any tax as a counterpart. Thus, the current system with which the purchaser of the goods purchases without VAT came into operation to subsequently self-pass and simultaneously deduct the tax in its quarterly settlement. This void is where “missing trader” scheme comes into play. If intra-community transactions worked in the same way as exports, importers should have declared and paid VAT at the customs office and deducted later in their quarterly liquidation preventing fraud. However, “missing trader” companies are created to profit from these holes still to be resolved by the fiscal authorities of European Union. In short, “missing traders”, once created are dedicated in its short period of life to acquire goods in large volumes in other countries of the European Union. They buy goods without VAT and the customs authorities do not inspect its merchandise. Then, they sell that merchandise to one or more "shell" companies, with the corresponding VAT, but without paying a euro of tax. Before the trimestral liquidation period arrives the “missing trader” has already gone missing with benefit of 21% of the total amount of the merchandise. If this scheme gets applied to a large volume of purchases, the benefits can be abysmal. Therefore shell companies, which form part of the same plot, acquire its products from “missing traders” practically at production cost, and can then resell them with a higher margin. These shell companies do declare their regulatory taxes. Its objective is to camouflage the connection between “missing traders” and the final companies-beneficiaries of the network that create the VAT carrousel fraud. 

Tax agencies hunting “missing traders”

As it is easy to imagine at first glance, the fraud that can be incurred by “missing trader” schemes is quantified in many millions of euros, which suppose a great detriment to the public capitals of the country. That is why the inspectors of the tax agencies try to fight against this fraud, requesting the collaboration of other national and international organizations, such as customs, and even community, connecting the tax administrations of other European countries. However, although they have been able to intercept a certain number of “missing traders”, it is also true that as soon as one goes missing another one appears on the scene. We speak of hundreds or thousands of these hierarchical traders and companies. For its part, governments in the European Union have shown their interest in putting an end to this series of corruption schemes, with a new fiscal reform against fraud. Among other things, the immediate denunciation is facilitated once the minimum amount of evasion allowed is reached, the crime is aggravated if the fraud is committed by a criminal organization and a package of measures is foreseen to hinder the dismantling of the “missing trader” scheme at the beginning the inspection or when the complaint is filed. These companies and traders have a preference for IT products, mobile telephony and hydrocarbons. All this has resulted that the United Kingdom being the first European country, behind Spain, most affected by the VAT carousel fraud, a network of corruption that, as we have already mentioned, is mainly based on the existence of this type of companies. Although the tax agencies strive hard to dismantle these fraudulent companies, the truth is that it is not a simple task. The existence of shell companies twists the operation of “missing traders”, and the greater the number of existing shell companies in the business structure of the fraud, the more complicated it is for tax authorities to find the illicit activity of “missing traders”.