Chinese VAT fraud – Introduction
In a startling revelation, the UK tax authority HM Revenue & Customs (HMRC) has admitted that it permitted 11,000 Chinese companies to register for VAT using a single residential flat in Wales without verifying the occupants.
This shocking disclosure came to light during a hearing with the Commons public accounts committee, where HMRC’s head confessed that no red flags had been raised about the high number of firms changing their registered address to the property in Cardiff.
What was the scheme?
The scheme was only discovered when the flat’s owner, Dylan Davies, was inundated with thousands of letters demanding over half a million pounds in VAT.
According to Jim Harra, permanent secretary at HMRC, more than 2,350 of the companies registered at the address owed money to the tax authority. Despite this, Harra stated that ongoing investigations had so far found no evidence of fraud or fraudulent intent.
The Times newspaper reported that Dylan Davies received up to 580 letters a week from HMRC at his Cardiff flat, demanding payment of VAT on goods sold to British customers through online marketplaces such as Amazon.
After contacting the police, Action Fraud hotline, and HMRC (which initially did not respond), the situation was only resolved when HMRC canceled the letters and called off the bailiffs who had been instructed to seize Davies’ property.
Commons Public Accounts Committee
Following the controversy, the Commons public accounts committee inquired why it took HMRC so long to address the issue and sought information on the potential tax revenue lost due to the scheme.
The committee’s chairwoman, Meg Hillier, described the case as “particularly worrying” and indicative of “systemic weaknesses in VAT registration and detection processes.”
Although Harra apologized to Davies, he admitted that HMRC had no means of preventing a similar scam from happening again. He explained that there was no requirement to provide proof of residence at a UK address when registering for VAT. In cases where an application meets specific risk criteria, additional checks are carried out, including requesting evidence to verify the business’s location at the provided address.
Harra acknowledged that such checks did not occur in this case and did not reveal whether HMRC had been able to trace the true locations of any of the companies that registered at Davies’ address. Many of these firms are believed to be Chinese companies without a physical presence in the UK.
Richard Allen, a VAT fraud campaigner, criticized HMRC’s poor track record of collecting tax owed by foreign sellers on platforms like Amazon. He expressed skepticism over HMRC’s claims that they couldn’t establish fraud when 11,000 companies all registered at a single residential address with no connection to the property. Allen urged HMRC to take the issue more seriously.
HMRC’s Jim Harra is expected to face further questioning from MPs on the committee next month. The National Audit Office, the government’s tax and spending watchdog, may also investigate the case.
Chinese VAT fraud – Conclusion
This shows worrying gaps in HMRC’s abilities to police the UK tax system. We are told that it has invested significant sums into high tech digital capabilities. However, one would expect such systems to be able to pick up co-ordinated attacks like this.
If HMRC is to afford itself a pat on the back for its efforts on the Eat Out to Help Out fraud then it is right that it faces scrutiny on failures such as these.
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