VAT fraud is the most common form of tax evasion worldwide. In the UK alone, authorities estimate that VAT fraud costs the treasury billions of pounds per year. According to the National Audit Office (NAO), HMRC estimated £5.5 billion lost due to tax evasion in 2022-23. As we move through 2025, the tactics for VAT fraud continue to evolve and HMRC now has even tougher regulations to combat it.
This article serves as your guide to understanding the scope of VAT fraud, the severe penalties one could face, and how to report suspected fraudulent activity.
Understanding VAT Tax Fraud 2024/25
Before diving into VAT fraud, it is important to understand the basics of Value-Added Tax (VAT). VAT is a multi-level tax in which buyers incur input VAT, whilst suppliers apply output.
As of 2025, businesses with an annual taxable turnover exceeding £90,000 are required to register for VAT. The de-registration threshold, on the other hand, is £88,000. Even if your revenue falls below this threshold, you can still register for VAT voluntarily.
Once registered, businesses must:
- Apply the correct rate.
- Submit accurate VAT returns.
- Pay VAT to HMRC on time.
- Maintain proper records.
VAT fraud is a form of tax evasion that involves underreporting sales, inflating purchases, or failing to remit collected VAT to HMRC.
VAT fraud leads to higher taxes and reduces public funding for healthcare, infrastructure, and education. It also distorts market competition, giving fraudulent businesses an unfair advantage over law-abiding firms.
How to Detect VAT Fraud Quickly
Several dubious behaviours for VAT fraud signal HMRC into action immediately, such as:
- Not registering for VAT schemes when required
- Using cash in all or most transactions
- Asking to receive payments via various names/addresses
- Using invalid or inaccurate VAT number
- Anonymous or confidential tax fraud reports
These might lead to VAT audits, different penalty rates, and in worst-case scenarios, criminal prosecution and imprisonment of up to 7 years. Whilst HMRC tip-offs may be given with good intentions, they may not always be accurate. Even so, investigations can be very time-consuming, which is why it is highly recommended to employ professional buffers that specialise in VAT fraud cases UK.
Types of VAT Frauds in 2024/25
VAT fraud comes in many forms, each designed to exploit loopholes in the tax system. Below are the most common VAT frauds in 2024/25:
Carousel Fraud (Missing Trader Intra-Community – MTIC)
Carousel fraud, also known as Missing Trader Intra-Community (MTIC) fraud, is one of the most damaging VAT fraud schemes. It involves a network of businesses across multiple countries that manipulate VAT rules on cross-border trade within the EU.
Here is how it works: A company (the “missing trader”) imports goods VAT-free from another EU country and sells them domestically, charging VAT. Instead of paying HMRC, the company disappears, leaving the government at a loss. Meanwhile, other businesses in the supply chain reclaim VAT they never actually paid, creating a fraudulent loop—hence the name “carousel.”
HMRC has tightened controls, requiring real-time transaction reporting and monitoring under CESOP (Central Electronic System of Payment Information) to detect anomalies. If you are involved in international trade, ensure full compliance to avoid unintentional involvement in an MTIC fraud scheme.
Missing Trader Fraud
Similar to carousel fraud, missing trader fraud involves businesses charging VAT on sales but failing to pay it to HMRC. However, in this case, the fraudster usually operates domestically rather than across borders.
A missing trader sets up a company, buys goods VAT-free (using fraudulent exemptions or misclassification), and sells them at competitive prices, collecting VAT from customers. Before HMRC can detect the fraud, the business shuts down, leaving unpaid VAT liabilities.
To counter this, HMRC uses the VAT reverse charge mechanism in high-risk sectors like electronics and construction, shifting VAT responsibility to the customer rather than the supplier.
If you are a VAT-registered business, verify the legitimacy of your suppliers and be cautious of deals that seem too good to be true. Transactions with unusually low prices or high-volume VAT reclaims could signal fraudulent activity.
E-Commerce VAT Fraud
With the rise of online shopping, e-commerce VAT fraud is quickly becoming a concern. Fraudsters exploit online marketplaces by failing to charge or pay VAT on sales, often misrepresenting their business location or underreporting sales figures.
Common tactics include:
- Selling from overseas warehouses whilst falsely claiming UK VAT registration.
- Listing items at VAT-free prices whilst avoiding tax obligations.
- Splitting large shipments into smaller transactions to stay below tax thresholds.
To combat this, HMRC has imposed stricter regulations on platforms like Amazon, eBay, and Shopify, requiring them to collect and remit VAT on behalf of overseas sellers.
If you are an online seller, make sure you have correctly registered for VAT and are complying with marketplace rules to avoid penalties. Customers can also protect themselves by checking VAT details on invoices when shopping from foreign sellers.
False Invoicing and Documentation
False invoicing fraud occurs when businesses create or manipulate invoices to evade VAT payments. This can happen in several ways:
- Issuing fake invoices for non-existent transactions to claim VAT refunds.
- Inflating purchase costs to reduce taxable profits.
- Creating duplicate invoices to claim multiple VAT deductions.
Fraudsters often set up fake supplier networks, generating bogus VAT numbers to appear legitimate. HMRC has enhanced digital VAT reporting through Making Tax Digital (MTD), making it harder for businesses to submit false claims.
To stay compliant, always verify supplier invoices, cross-check VAT numbers with HMRC’s VAT Information Exchange System (VIES) and maintain accurate digital records. Falsifying invoices is a criminal offense that can result in heavy fines and prosecution.
Suppression of Sales and Cash Transactions
Also known as zapper fraud, this scheme involves deliberately underreporting sales to reduce VAT liability. Businesses—especially those in hospitality, retail, and cash-heavy industries—may use hidden software to delete sales records or fail to report cash transactions altogether.
Examples include:
- Using ESS software to erase transactions.
- Offering discounts for cash payments and not recording them.
- Running parallel accounts—one for tax purposes and one for real earnings.
To combat this, HMRC has introduced tougher regulations on point-of-sale (POS) systems and cash registers, making it mandatory to maintain transparent transaction records.
If you run a VAT-registered business, make sure all kinds of sales are properly recorded and reported. Audits and surprise inspections are becoming more frequent to catch VAT evasion.
Abuse of VAT Schemes and Exemptions
Certain VAT schemes, like the Flat Rate Scheme (FRS), VAT Exemption Rules, and Margin Schemes, are designed to simplify tax obligations. However, some businesses misuse exemptions to reduce or avoid VAT payments.
Common abuses include:
- Misclassifying goods/services to qualify for lower VAT rates.
- Splitting businesses to stay below VAT thresholds.
- Claiming VAT refunds on personal expenses disguised as business costs.
HMRC continuously reviews VAT relief claims and audits businesses suspected of abusing these schemes. If you are using a VAT scheme, make sure your claims are legitimate and within the legal framework. Misuse can lead to penalties, VAT repayment demands, and even criminal prosecution.
Learn more about VAT exemptions and when not to charge VAT to ensure your business follows the right practices.
What are VAT Fraud Penalties in 2024/25?
VAT fraud is a serious offense, and HMRC has strict penalties to deter fraudulent activities. If a business is caught engaging in VAT fraud, it faces severe consequences. These can include:
- Civil penalties: Up to 100% of the tax evaded plus interest.
- Criminal prosecution: Leading to unlimited fines or imprisonment for serious fraud.
- Business closure: HMRC has the power to shut down non-compliant businesses and disqualify directors.
- Confiscation of assets: Under the Proceeds of Crime Act, authorities can seize assets gained through VAT fraud.
- Tax investigation audits: HMRC may conduct a full tax audit, potentially leading to further fines and penalties.
Aside from fraud-specific penalties, businesses that fail to meet VAT obligations also face standard VAT penalties, including late payment fines and the VAT penalty points system.
VAT Late Payment Penalty
If you fail to pay VAT on time, HMRC imposes a late payment penalty system based on the number of days overdue:
- 1 to 15 days late: No penalty if you pay or arrange a Time to Pay (TTP) agreement within this period.
- 16 to 30 days late: A 2% penalty on the unpaid VAT on day 15.
- 31+ days late: A 4% penalty on the outstanding VAT on day 30, plus daily interest at the Bank of England base rate + 2.5% until fully paid.
If you frequently miss deadlines, penalties can accumulate, making it crucial to keep up with your VAT obligations.
Tip: Setting up direct debit payments or using Making Tax Digital (MTD) for automated VAT returns can help avoid unnecessary fines.
VAT Penalty Points System
HMRC’s VAT Penalty Points System applies to businesses that repeatedly submit late VAT returns. Instead of immediate fines, you receive penalty points, and once you hit a threshold, a £200 fixed penalty is charged.
Thresholds depend on your VAT return frequency:
- Annual submissions – 2 points
- Quarterly submissions – 4 points
- Monthly submissions – 5 points
Each late submission adds one penalty point, and exceeding the threshold triggers a fine. To reset your penalty points, you must meet all VAT filing deadlines for a compliance period (e.g., 24 months for annual filers).
Tip: If you frequently struggle with VAT deadlines, consider using automated VAT software or hire our expert accountants to stay compliant.
How to Pay Vat Penalty
If you receive a VAT penalty from HMRC, you must settle it promptly to avoid additional charges. Payments can be made through:
- Online via GOV.UK: Using a debit/credit card or bank transfer.
- Direct Debit: Ensuring automatic payments for future VAT returns.
- Telephone Banking or CHAPS: For same-day processing.
- Bacs or Standing Order: Typically takes 3 working days.
If you cannot pay the full amount, you may request a Time to Pay (TTP) arrangement. This allows you to spread payments over an agreed period, reducing the risk of further penalties.
Your Responsibilities as a VAT-Registered Business
As a VAT-registered business, you have legal obligations to ensure compliance with HMRC’s regulations. Here is what you need to do:
1. Charge the Correct VAT Rate
You must apply the correct VAT rate (standard, reduced, or zero) on all taxable goods and services. Charging the wrong rate, whether intentionally or due to negligence, can result in penalties and tax audits.
2. Keep Accurate VAT Records
Proper record-keeping is essential. You must:
- Maintain invoices, receipts, and VAT records for at least six years.
- Use Making Tax Digital (MTD)-compliant software to submit VAT returns.
- Keep a detailed VAT account, showing input and output tax calculations.
3. VAT Returns on Time
VAT returns must be filed quarterly or annually, depending on your VAT scheme. Late submissions will incur penalty points and potential fines under the VAT Penalty Points System.
4. Pay VAT to HMRC Promptly
You must pay VAT liabilities on or before the due date to avoid late payment penalties. If you are struggling, you can request a Time to Pay (TTP) arrangement to spread payments over time.
5. Avoid VAT Fraud and Tax Evasion
As a registered business, you are responsible for preventing VAT fraud, whether through deliberate underreporting or unintentional errors. This includes:
- Ensuring all invoices are genuine.
- Avoiding fraudulent VAT claims.
- Reporting suspicious VAT activities (e.g., missing trader fraud).
6. Keep Up with VAT Law Changes
VAT regulations change frequently. Stay updated with HMRC notices, CESOP updates, and Making Tax Digital (MTD) requirements to avoid compliance risks.
Following these responsibilities will keep your business legally compliant and prevent unnecessary financial and legal troubles.
Reporting VAT Fraud to HMRC
VAT fraud affects not just the government but also legitimate businesses that operate fairly. If you suspect fraud, you have a duty to report it to HMRC’s Fraud Hotline.
You can report VAT fraud confidentially through:
- HMRC’s Online Fraud Reporting Tool – Accessible 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 fraud, provide as much information as possible, including:
- Business name, address, and VAT number (if known).
- Details of fraudulent activities (e.g., false invoicing, underreported sales).
- Supporting documents (if available).
Frequently Asked Questions (FAQs) About VAT Fraud
Once you submit a report, HMRC launches an investigation using its tax fraud detection units, AI-driven compliance systems, and CESOP monitoring for cross-border transactions. The investigation process varies depending on the severity of the suspected fraud.
Yes. HMRC treats all VAT fraud reports confidentially. If you choose to report fraud anonymously, your identity will not be disclosed under any circumstances. However, providing your contact details can assist HMRC in gathering further information, leading to a stronger case against fraudsters.
Yes, but penalties depend on intent. If the error is genuine, HMRC may only require you to correct it and pay any VAT owed. However, careless mistakes can result in fines of up to 30% of the unpaid VAT, whilst deliberate misreporting can lead to penalties of up to 100%.
HMRC can review VAT records up to four years for basic errors, six years for careless mistakes, and twenty years for deliberate fraud. If you are contacted for an investigation, seek professional tax advice to ensure compliance and minimise risk.
Get Expert VAT Advice and Support for Your Business
Many business owners struggle with VAT registration, tax filings, and VAT fraud prevention, often realising the risks too late. A minor reporting error or an unintentional oversight could trigger an HMRC investigation, draining your time, money, and peace of mind. With Legend Financial, your business stays compliant whilst maximising efficiency.
If you are facing a VAT investigation or want to report, do not take risks. Consult with professionals who understand the latest regulations. Protect your business and stay ahead of VAT changes. Get in touch with our experts today!
