Midland businesses should make sure they are aware of their legal responsibilities when it comes to so-called " missing trader fraud", according to VAT specialists at Grant Thornton in Birmingham.
MTF is a form of VAT fraud in which traders import goods VAT-free before selling them on at VAT inclusive prices without passing on the VAT collected to Customs.
With recent figures published by the Office for National Statistics suggesting that MTF may now distort the UK's trade figures by hundreds of millions of pounds, HM Revenue and Customs looks certain to intensify its efforts to clamp down on the schemes.
This could mean that Midland firms, primarily those in the technology and telecoms sectors, could find themselves under closer scrutiny.
James Hurst, VAT senior manager at Grant Thornton's Birmingham office, said: "The Finance Act 2003 introduced new legislation making taxpayers jointly and severally liable for unpaid VAT on a supply of telephone or computer-related equipment made by another taxpayer.
"This means that any firm caught in a supply chain where MTF has taken place will be liable for the fraud unless it can prove it had no knowledge of it, or reason to suspect that the fraud was taking place.
"There are two main forms of MTF - acquisition fraud and carousel fraud. With acquisition fraud, fraudsters obtain a VAT registration number to acquire goods VAT free from other EU member states.
"These goods are then sold on at VAT-inclusive prices before the fraudster ' disappears' without paying the VAT they have collected to Customs - literally becoming a 'missing' trader. Carousel fraud is more complex with goods being supplied through a chain of companies before finally being exported back to a company in another EU member state, where the cycle can begin again.
"The recent expansion of the European Union has exacerbated the problem, particularly regarding carousel fraud, as the sheer cost of tracking and controlling the problem is prohibitive to many newer members." For Midlands businesses that fear they may be caught up in MTF, there are steps they can take to protect themselves.
"HMRC considers that a company is liable for the payment only if it had reasonable grounds for suspecting that the VAT on the supply would go unpaid," said Mr Hurst.
"Reasonable grounds for suspicion would include those where a company has purchased goods for less than the open market value or where the price payable was less than that offered by any previous supplier. All businesses should carry out reasonable checks into the integrity of the members of their supply chain if they are to ensure they are properly protected.
"By doing so, and recording the findings, companies should have sufficient records to demonstrate to Customs that they took reasonable steps to prevent being unwittingly caught up in such activity. Admittedly, this will increases the administrative burden, but it is time well spent when the alternatives include tax bills and a possible custodial sentence."