The value of the pound fell against the dollar and euro over the weekend, as news emerged that UK ministers were planning new legislation to undercut key provisions of the EU withdrawal agreement, giving rise to fears that the UK will face an end-of-year “no deal” Brexit.
The Financial Times first reported that the “Internal Market Bill” would undermine the legal force of areas of the agreement in areas including customs in Northern Ireland and state aid for businesses, risking a potential collapse of trade talks with the EU. Downing Street later described the measures as a standby plan in case talks fall through.
Political backlash followed as Michelle O’Neill, Northern Ireland’s Deputy First Minister, described any threat of backtracking on the Northern Ireland Protocol as a "treacherous betrayal which would inflict irreversible harm on the all-Ireland economy and the Good Friday Agreement". Scottish First Minister Nicola Sturgeon also stated that the legislation would “significantly increase” odds of a no-deal Brexit.
The pound was down 0.6% against the dollar by 10am on Monday for a total slide of 1% against the dollar in the past 5 days. The pound also slid 0.5% against the euro for a total of 0.7% in the same period.
The value of the pound is now equivalent to $1.319, or €1.1145.
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The eighth round of Brexit talks is set to begin on Tuesday, aimed at forming a deal that will allow companies in the UK and EU to trade without being hindered by customs checks or taxes.
The news follows Prime Minister Boris Johnson’s imposition of a 15 October deadline for securing a Brexit deal, recommending that both sides “move on” if no such agreement is reached by that date. The proposed deadline would come far ahead of the slated end of the transition period on 31 December 2020.
Scotland-based renewable energy producer SSE has been fined £2 million by the Office of Gas and Electricity Markets (Ofgem) for failing to publish timely information about the future availability of its generation capacity, the government body reported on Thursday.
Ofgem stated that the disclosure breach related to capacity at the Fiddler’s Ferry power station, which is under SSE’s contract with National Grid. The failure to disclose relevant information could have had a “significant effect” on wholesale electricity rates.
While SSE had not “acted in bad faith,” the steepness of the fine “sends a strong message” to all entities in the energy market, Ofgem stated.
Martin Pibworth, SSE’s Energy Director, conceded in a separate statement that SSE’s approach to disclosure was not in line with Ofgem’s requirement for disclosure to the market at an earlier stage, but emphasised that the company acted in good faith and published contract details “in line with our interpretation of the REMIT regulations at the time.”
“SSE did not benefit from disclosing only once the contract was signed and remains committed to clear and transparent rules for all market participants. We will be pressing regulatory authorities for additional guidance for market participants going forward,” he continued.
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Ofgem confirmed that SSE qualified for a 30% discount on the predicted penalty due to its early settlement and cooperation during the investigation.
The £2 million fine was the first of its kind to be issued in the UK and Europe for failure to achieve “effective and timely” disclosure of insider information under REMIT (Regulation on Energy Market Integrity and Transparency).
Richard Harmon, Managing Director of Financial Services at Cloudera, discusses the importance of relevant machine learning models in today's age, and how the financial sector can prepare for future changes.
The past six months have been turbulent. Business disruptions and closures are happening at an unprecedented scale and impacting the economy in a profound way. In the financial services sector, S&P Global estimates that this year could quadruple UK bank credit losses. The economic uncertainty in the UK is heightened by Brexit, which will see the UK leave the European Union in 2021. In isolation, Brexit would be a monumentally disruptive event, but when this is conjoined with the COVID-19 crisis, we have a classic double shock wave. The duration of this pandemic is yet to be known, as is the likely future status of society and the global economy. What the ‘new normal’ will be once the pandemic has been controlled is a key topic of discussion and analysis.
In these circumstances, concerns arise about the accuracy of machine learning (ML) models, with questions flying around regarding the speed at which the UK and EU will recover relative to the rest of the world, and what financial institutions should do to address this. ML models have become essential tools for financial institutions, as the technology has the potential to improve financial outcomes for both businesses and consumers based on data. However, the majority of ML models in production today have been estimated using large volumes and deep histories of granular data. It will take some time for existing models to be re-estimated to adjust to the new reality we are finding ourselves in.
The most recent example of such complications and abnormalities, at a global scale, was the impact on risk and forecasting models during the 2008 financial crisis. Re-adjusting these models is by no means a simple task and there are a number of questions to be taken into consideration when trying to navigate this uncertainty.
ML models have become essential tools for financial institutions, as the technology has the potential to improve financial outcomes for both businesses and consumers based on data.
Firstly, it will need to be determined whether the current situation is a ‘structural change’ or a once in a hundred years ‘tail risk’ event. If the COVID-19 pandemic is considered a one-off tail risk event, then when the world recovers, the global economy, the markets, and businesses will operate in a similar environment to the pre-COVID-19 crisis. The ML challenge, in this case, is to avoid models from becoming biased due to the once-in-a-lifetime COVID-19 event. On the other hand, a ‘structural change’ represents the situation where the pandemic abates, and the world settles into a ‘new normal’ environment that is fundamentally different from the pre-COVID-19 world. This requires institutions to develop entirely new ML models that require sufficient data to capture this new and evolving environment.
There isn’t one right answer that fits every business, but there are a few steps financial services institutions can take to help them navigate this scenario.
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When facing a crisis of unprecedented size such as this one, it’s time to look inwards and review the technology investments in place and whether crucial tools such as ML models are being deployed in the best way possible. Financial institutions should face this issue not as responding to a one-off crisis, but as a chance to implement a longer-term strategy that enables a set of expanded capabilities to help prepare them for the next crisis. Businesses that put in time and effort to re-evaluate their machine learning models now will be setting themselves up for success.
New figures released by the United States Department of Labor on Thursday revealed that 1.3 million people filed for unemployment benefits in the past week – 50,000 more than the expected 1.25 million.
Coinciding with a spike of 75,000 coronavirus cases in the US, the highest single-day increase yet recorded, the disappointing unemployment statistics had a knock-on effect on investor enthusiasm that soon became visible in the markets. The Dow and S&P both opened down 0.7%, and the Nasdaq saw a loss of 1.1%.
“The mild risk-off tone to the start of the US session is keeping stocks in the red after a softer European session,” commented Neil Wilson, remarking that the prominence of US unemployment figures “cast a shadow” over global markets.
Outside the US, surprising slides were also seen in prominent Asian markets, with a fall of 4.5% in the Shanghai Composite, 5.3% in the Shenzen Component and 1.6% in the Hong Kong Hang Seng. After reports emerged of better-than-expected Chinese GDP, indicating an 11.5% month-on-month increase in economic output in June, these stock market tumbles were especially jarring.
Even less-affected European markets still saw a decline, with a 0.3% slip recorded in both the FTSE 100 and the DAX and a drop of 0.4% in the CAC 40 by the afternoon.
Detsche Bank strategist Jim Reid commented on Friday that the Chinese markets’ loss could be attributed to a 1.8% dip in June retail sales, adding that a recent jump in confirmed COVID-19 cases in the region “seems to also be acting as an overhang.”
Monday was a day of contrasts for the US economy, as stocks continued to bounce back even as the National Bureau of Economic research confirmed that economic growth hit a peak in February and has since been contracting.
As it emerged that the economic downturn began before lockdown measures were put in place in the US, but after China and other countries were severely struck by COVID-19, the Nasdaq was reaching an all-time high at 9,924.75 points, a bounce of 44% up from its March 23 low.
The S&P 500 also saw a gain of 1.2%, finally recouping all of its COVID-induced losses from earlier in the year. At the same time, the Dow Jones Industrial rose by 1.7%.
The markets’ optimism can be traced back to the Burea of Labor Statistics’ surprising announcement on Friday that unemployment in the US fell by 1.3% in May, hinting at a faster economic recovery than expected. Though the accuracy of these figures has since come under dispute, the positive sentiment has remained.
European stocks were not buoyed by America’s enthusiasm, with Tuesday morning seeing Germany’s DAX slide by 1%, accompanied by a dip of 0.6% from Britain’s FTSE 100 and 0.7% by France’s CAC 40.
Lee Wild, head of Equity Strategy, cautioned investors that “the full economic consequences of the pandemic are still to be felt.”
Following a Thursday meeting of its Governing Council to determine monetary policy decisions, the European Central Bank has announced that it will enlarge its emergency bond-buying programme by €600 billion in a further effort to help European economies weather the damage caused by the COVID-19 pandemic.
“The envelope for the pandemic emergency purchase programme (PEPP) will be increased by €600 billion to a total of €1,350 billion,” the ECB wrote in its statement on the meeting.
“In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households.”
In further measures, the ECB declared that purchases under the programme will continue until the end of June 2021 at the earliest. Interest rates remain unchanged.
The scale of the move has taken investors by surprise. Ulas Akincilar, INFINOX’s head of trading, described the move as ECB chief Christine Lagarde “firing the Euro bazooka”.
Despite the new stimulus measures, the stock surge that followed had little momentum, and most indexes returned to normalcy ahead of US markets opening on Thursday. The FTSE 100 and DAX were each down by 0.6%, and the CAC 40 by 0.3%.
The precise shape of the UK’s post-Brexit taxation regime is yet to be decided; however, the indications are that radical changes are unlikely. Much will depend on the terms of the UK-EU trade deal, which is due to be negotiated this year. The EU has been abundantly clear that UK alignment in terms of taxation, labour and environmental regulation is the price for EU market access.
Yet, former Chancellor, Sajid Javid, warned that "There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union – and we will do this by the end of the year." It remains to be seen whether his successor, Rishi Sunak, will be as bold or soften in the face of the economic consequences of losing trade with the EU. Below, Miles Dean, Partner at Andersen Tax UK, offers Finance Monthly his predictions on what we are likely to see in terms of taxation as future trade deals are negotiated.
Given the scale of UK trade with the EU, it appears probable that substantial alignment will ultimately be seen as a wise trade-off in order to retain valuable market access to the EU. The EU remains the UK’s largest trading partner. 44% of all UK exports went to the EU in 2017, with 53% of all UK imports coming from the EU. The efficient operation of cross-border supply chains are vital to the UK’s automotive and aerospace industries. These largely depend on the free movement of goods across the Channel.
The Conservative Party’s clear majority in the 2019 general election makes the UK’s future tax policy somewhat more predictable. While some more excitable commentators feared that the Conservatives would slash corporation tax, deregulate and sell off the NHS, the party’s 2019 manifesto went in rather the opposite direction - deferring a scheduled cut in corporation tax to fund the NHS. Section 46 of the Finance Act, 2016 had pledged to reduce the rate of corporation tax from 19 percent to 17 percent from 1 April 2020. However, Prime Minister Johnson told the Confederation of British Industry’s annual conference on 18 November 2019 that the this planned reduction would be put on hold to fund the NHS and other “national priorities”.
44% of all UK exports went to the EU in 2017, with 53% of all UK imports coming from the EU.
To offset this disappointment to UK business, the Conservative Manifesto announced other business-friendly measures, including a review of business rates, an increase in the R&D tax credit rate from 12% to 13% and an increase in the structures and buildings allowance from 2% to 3%. Yet none of this amounts to anything resembling dramatic reform. Indeed, this cautious approach rather suggests that the government is heeding the EU’s bottom line in terms of alignment, and that it does not intend to radically alter the UK’s taxation regime.
The idea of the UK becoming a giant Singapore-style tax-haven after Brexit also appears to be on hold. Indeed, the government is even promising additional anti-tax avoidance measures and a new digital services tax, showing a commitment to maintaining and even expanding the UK’s tax base.
The new digital services tax may yet be influenced by trade negotiations – this time those with the United States, as regards a US-UK trade deal. The Government’s plans to introduce a 2% digital services tax from April 2020 would disproportionately affect US tech companies such as Google and Facebook. The US treasury secretary Steven Mnuchin has warned of retaliation by new US taxes on UK car imports, saying “If people want to just arbitrarily put taxes on our digital companies we will consider arbitrarily putting taxes on car companies.” Downing Street replied in turn, saying that such tariffs would “harm consumers and businesses on both sides of the Atlantic. We feel [the digital tax] is a proportionate step to take in the absence of a global solution. We made our own decisions in relation to taxation and will continue to do so.”
Despite the Government’s declaration of independence in terms of taxation policy, this incident illustrates that any greater independence in trade and taxation policy brought by Brexit has limits. There will inevitably be trade-offs and constraints. UK decisions on taxation do not operate in isolation, but can have broader political and economic consequences. The UK exports some £8.4 billion worth of cars to the US each year. The early agreement of a UK-US trade is a priority for the government. US pressure may well yet influence the government’s digital taxation plans.
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Nobody can predict the future. When it comes to Brexit, events are notoriously unpredictable. However, the actions of the UK government have been moderate – even if the rhetoric is sometimes less so. Mr Johnson came to power with the promise of keeping the credible threat of no-deal on the table, as a negotiating tactic. However, his aim was not to end up with no deal, but with a more favourable one. Having made the compromises required to achieve a withdrawal agreement, we can hope that a similarly reasonable approach will prevail in the UK-EU trade negotiations. No doubt the threat of no-deal will also remain on the table, for tactical reasons, as before. Therefore, while it is possible that the talks will collapse, resulting in a no-deal Brexit at the end of 2020, that outcome appears unlikely.
Even in a no-deal scenario, the Government’s no-deal Brexit tariff regime means that 88% of imports would not be taxed. The Confederation of British Industry estimates that 90% of the UK’s goods exports to the EU, by value, would face tariffs averaging 4.3%.
While the UK could theoretically abolish VAT after Brexit, the technical guidance for a no-deal Brexit indicated that the current VAT system would continue. Since it raises around £125 billion per annum, it is inconceivable that it will be abolished let alone restructured to any significant degree.
While the UK could theoretically abolish VAT after Brexit, the technical guidance for a no-deal Brexit indicated that the current VAT system would continue.
A no-deal Brexit would disproportionately impact sectors such as agriculture and manufacturing. Likewise many EU sectors would be badly affected. Since a deal is in the interests of both sides, it’s reasonable to hope that one will be achieved, even if it is imperfect.
The broad shape of a UK-EU agreement that would facilitate market access is already known. It will require sufficient UK alignment on key matters, including taxation. While the detail is undecided, in broad terms it means little change to the UK’s taxation regime. Perhaps, the government may seek some wriggle-room on VAT or corporation tax. Yet the fact that the government has shown no appetite for radical change in taxation is telling. Maintaining the status quo on taxation helps to keep a UK-EU trade deal within the government’s sights.
Miles Dean is Head of International Tax at Andersen Tax in the United Kingdom. He advises privately held multinational companies, entrepreneurs and high net worth individuals on a wide range of cross border tax issues.
Andersen Tax provides a wide range of UK and US tax services to private clients and businesses, helping them achieve their personal and commercial objectives in a tax efficient manner.
Interest in digital currency has grown significantly in the last few years. In this piece, we explore what digital currencies are, the current state of the cryptocurrency market and how it will impact the economy over the next few months based on current trends and events occurring in the UK.
Put simply, cryptocurrency is a digital currency managed by a network of computers.
Run through open source code, computers are used to verify each cryptocurrency transaction. Unlike traditional physical currency, they are decentralised and not managed by a central bank.
You have probably already heard of Bitcoin, which was one of the first types of cryptocurrency to come into existence. However, hundreds of other currencies have been developed since and each have different characteristics. For example, the coin Ethereum can be used to create contracts and run applications, while Litecoin and Bitcoin Cash run in a simpler way to Bitcoin, with the focus of these currencies being on processing transactions.
The technology used to manage these transactions is known as Blockchain. This technology has been around for a while and is used for many other purposes, including updating healthcare records. The UK government is even investing in blockchain to record and administer pension and benefit payments.
Cryptocurrencies have a huge amount of potential, particularly when it comes to providing accessible options for allowing people across the world to exchange money.
Currently, the use of cryptocurrency is still an emerging trend with a limited number of businesses accepting it as a payment method. These digital currencies are experiencing somewhat of an identity crisis as debates around its definition as a currency or commodity continue and authorities argue over whether it should be regulated.
Cryptocurrencies have a huge amount of potential, particularly when it comes to providing accessible options for allowing people across the world to exchange money.
However, governments and banks are reconsidering their cautious attitude towards digital currency as global businesses begin to invest in this technology. Facebook’s upcoming launch of their coin, the Libra, has caught the attention of the Bank of England. The BoE have warned Facebook that their currency would need the same level operational resilience as debit and credit card accounts, if they are to manage high volumes of transactions securely.
Libra will not be decentralised like other cryptocurrencies. Instead, it will be managed by an association of major technology and financial service companies.
Some EU governments have taken a hard-line approach, with France’s Finance Minister declaring that they will not allow the use of Libra within Europe. They state that the currency would put consumers at risk of financial fraud. Nevertheless, with the UK’s recent withdrawal from the European Union, it is likely that they will be exempt from such measures.
Brexit has also presented new opportunities for cryptocurrency processors. It is predicted that more cryptocurrency exchange offices will open in Dublin in 2020. This hotspot is ideal as it is an EU member with close proximity to the UK market.
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While cryptocurrencies are often seen as a highly volatile form of currency, the recent worldwide Coronavirus outbreak has had a damaging impact on the global economy and resulted in investors seeing digital currencies as a safe haven.
The virus is predicted to result in consumers buying less at physical stores as they avoid getting infected. As a result, the amount of online purchases being made is set to increase significantly, and with more powerful firms such as Facebook migrating over to cryptocurrency transactions, we can expect more and more of these purchases to be made with digital money.
N26, which has a European banking license, is still one of the smaller challenger banks in the UK, but on April 15 it will be closing around 200,000 UK customer accounts. It has stated the reason behind this is difficulties surrounding Brexit, as the “timing and framework” of the withdrawal bill has made it impossible to continue operating in the UK.
Thomas Grosse, chief banking officer at N26, said: "While we respect the political decision that has been taken, it means that N26 will be unable to serve our customers in the UK and will have to leave the market."
Finance Monthly also heard from Forrester’s senior analyst Aurelie L’Hostis, who said: “N26’s launch in the UK might have felt like a natural next step back in 2018. The challenger bank had successfully attracted half a million customers in 17 European countries, and it could then use its European banking licence as a parachute. Yet, Brexit was already looming ominously in the distance back then – and there were questions regarding the validity of that licence post-Brexit. Beyond that, N26 entered the UK market on the heels of fast-moving rival challenger banks Monzo, Revolut and Starling Bank. Catching up was not going to be easy.”
All N26 accounts in the UK will function until April 15 as normal but will subsequently be closed automatically. Any money that customers fail to remove form the accounts will be placed in a holding account by default. It said UK staff involved in the business will move into other roles.
Other challenger banks like Monzo and Starling have UK licenses, which is why they likely won’t be pulling out of the UK anytime soon.
Delving into the latest impacts of Donald Trump’s impeachment trials on investors around the world, Wael-Al-Nahedh, CEO at Spearvest, gives us a rundown on the influence of global politics and the volatility of investment in 2020.
After three years of failed negotiations, sharp words, a prime ministerial resignation and a Christmas general election, at long last the UK government has a clear majority and the overall decision on the country’s future relationship with the European Union (EU) has been agreed. On top of this, China and the US trade deal tensions seem to be simmering down and global markets can look forward into what we all hope will be an extended period of global market stability. Meanwhile the ongoing stand-off between Iran and the world’s biggest economy appears to have quietened down, at least for the moment.
What’s more, in December 2019 and after months of speculation, the world watched as Donald Trump became only the third president of the United States history to be impeached, only to be swiftly acquitted, as was expected to happen given the Republican majority in the Senate.
However, as recent events in Wuhan, China have proven, major challenges can appear suddenly and without warning. The fast-spreading Coronavirus in Wuhan has already had a substantial impact on the Chinese economy. This crisis has led to fears around international travel and public health emergencies, in turn damaging supply chains and knocking investor confidence just as it was starting to bounce back.
This was a reminder that repercussions from local risks can have a global impact on financial markets. Specifically, what are the current challenges and how can investors navigate these situations?
All eyes will be on the US election this year, and many investors will tread cautiously in the US stock market depending on updates and promises in policy, and polling predictions when it comes to the people’s favourite candidate.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
Alternatively, we might see certain sectors flourish from now until election day, as trade deals are renegotiated or tariffs on foreign goods are imposed or revoked. It was announced this week that China will halve tariffs on some US imports as it moves quickly to implement its ‘phase one’ trade deal.
History dictates that election years often offer prosperity when it comes to the stock market, regardless of who is eventually elected. In fact, when examining the return of the S&P 500 Index for each of the 23 election years since 1928, only four have been negative.
US and Iran haven’t had the best of relations for a few decades now, and US sanctions on Iran’s oil exports last year had already crippled the Iranian economy. And, to see the new year in, tensions flared as a US-led drone strike killed General Qasem Soleimani in Baghdad.
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On January 10th, Trump announced sanctions that went beyond oil and gas and now targeted construction, mining, manufacturing and textile goods. As a result, trade with Iran is flatlining worldwide and investors, companies and lenders should do well to avoid any partnership or investment with Iranian goods or businesses, such as the recently blacklisted, Mahan Air.
On the other hand, market impact hasn’t been as severe as one might have initially expected. Oil prices are still below the level they hit in September 2-19 after the Saudi Aramco oil attack.
The most significant impact on the global economy has emerged as a result of a Global Health Crisis, as a new strain of Coronavirus has all but isolated China from the rest of the world. The true impact on the economy resulting of this terrible human tragedy, is as yet unknown.
Short-term impact on the stock market in China has correlated to the global significance of this devastating virus: stock markets in china saw their biggest fall in five years as traders rushed to sell-off Asian equites amid continued fears about the impact of the Coronavirus on the global economy. Investors should keep a keen eye on the spread of this virus, as we could see it affect international markets quite severely should the number of cases of infection increase dramatically in key markets such as the US or Germany, for example.
The virus has also had a substantial impact on oil markets, with prices declining sharply as demand from China dissipates through diminished air travel, road transportation and manufacturing. Given the fact that China under normal circumstances consumes 13 of every 100 barrels of oil the world produces, we can expect the impact on oil markets to further increase should this global health crisis widen.
If not contained, retail sales and travel could suffer consequently in the next few months, especially as industrial production struggles to recover after last year’s extended slump and the consequences of the US-China trade war, which has already cut Chinese economic growth to its lowest level in 29 years.
Such episodes of global nervousness often - counter-intuitively - represent considerable opportunity for those investors who are willing to buy when others are selling. Attractive opportunities typically arise in times of high volatility, which brings to attention the importance of relying on independent and unbiased advice before deciding to invest at a time of great global economic and political uncertainty.
Some of the highest returns in global markets often happen around periods of high volatility in an unpredictable fashion, and that is why thorough planning and a long time horizon give investors a great advantage. Over 10 years, equities have earned excess returns over cash 95% of the time. The return of a buy-and-hold investor in the S&P 500 over the past 20 years has been more than 220%, versus just 42% for someone who sold at each new all-time high and waited for a 5% pullback to reinvest.
Finally, one should always diversify an investment portfolio adding into low-correlated investments, include income-generating hard assets (like real estate), invest with a long-term horizon, and of course increase the understanding of risks.
Today marks the day that the UK finally leaves the EU. It also marks the day where all self-assessment tax returns are due, and many in the accountancy sector are concerned that focus on Britain's exit from the European Union might lead to huge delays in tax returns being submitted in time.
Last tax year, 704,000 returns were submitted on the deadline day, while another 477,000 returns were filed late. Even though the time is running out, there are still some things that taxpayers can do before the clock hits midnight on Friday. TaxScouts, a specialist tax returns company, gave us their advice for anyone who still needs to get their returns done during the Brexit melee:
Although it might not seem that Brexit and delays in tax returns are linked, historically many tax returns are filed late and HMRC struggled to cope with the workload in 2019, something experts foresee happening again this year. Previously HM Revenue and Customs (HMRC) has issued warning letters in February following each January deadline. However, in 2019, many of the warnings weren’t sent until late April. The delays were being caused by the heavy workload currently being shouldered by civil servants due to Brexit preparations.
If this happens again, HMRC claimed last year that no one will be “unfairly penalized” and accountants hope this will be the case once more despite Brexit Day and Deadline day sharing the same January 31st calendar space.
From the characteristics of MITC fraud arrangements to the tangible damage that such schemes can cause, below Jérôme Bryssinck, Head of Government Solutions at Quantexa, talks Finance Monthly through the options for fighting VAT carousel fraud.
Europol believes that missing trader intra-community (MITC) fraud (usually known as ‘VAT Carousel’ fraud) costs authorities around €60 billion annually. MITC is a highly sophisticated form of fraud which can be carried out due to the way that pan-European legislation means cross-border trade may be carried out VAT free. Due to the complexity of the schemes, MITC is hard to fight, and entire legal businesses frequently become unwitting participants in the carousel. Innovative technologies and new policies must be used to tackle this fraud robustly.
By its nature, the EU trading bloc enables the converging of regulations and standards and the removal of barriers to international export, in order to make trade within the bloc simpler and less expensive. MITC fraud works by taking advantage of the EU legislation around cross-border transactions- traders receiving services or goods from an entity in the EU do not have to pay VAT, as intra-community transactions are VAT exempt.
To create a ‘carousel’, a criminal will create or buy companies to acquire goods (let’s call them Company A in this example). These companies will next buy goods from a company in the EU (Company B). Company A will then purchase goods from Company B, with no VAT being due. Company A will then peddle these goods to a different company (Company C). This company could be a legitimate one, or a company managed and set up by the criminals. Here, VAT will be added to the sale price. Since the goods have been sold domestically, Company A must legally declare the VAT it has included on the goods, and pay this to HMRC. In the case of MITC fraud, though, Company A will vanish, and the VAT will not be paid. The goods will then be passed through many other companies which function as a buffer so as to complicate any potential investigation. Next, a company (Company D) will send these goods out of the EU and reclaim the VAT that was not in fact ever paid to HMRC. This loss of tax revenue negatively affects the provision of crucial public services for the country including education, policing and healthcare, and also increases the tax obligations of honest taxpayers.
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Because millions of euros worth of goods are traded daily, it is hard to identify illegal activity amongst so much legal activity. Combatting VAT carousels is made more difficult by the way that member states need to coordinate across separate national borders. The data needed to investigate MITC fraud criminals will commonly be stored in different forms and will be owned by disparate regulatory or government bodies across the EU. In many cases, ‘carousels’ will already have dissipated by the time authorities realise criminal activity has occurred, allowing the criminals to remain unidentified and the money to have already been lost. Those seeking to fight MITC fraud are therefore unlikely to be able to act to prevent such crimes from being carried out.
Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud. A priority is to speed up the sharing and analysing of data at a European level. Data analytics technology should be used to better comprehension of the broader context of each individual company, so that tax departments build a bigger picture of the trades that are being carried out.
Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud.
Such technology would be able to identify anomalies and red flags, such as if a company with an annual turnover of €200K was able to order €2 million’s worth of goods. Under an improved system of data gathering and sharing, VAT information would be collated and interpreted by machines, and AI would be utilised to create risk models that would help improve the accuracy of identifying anomalous results. This information could be shared with a case handler, who would be able to act more swiftly to investigate criminal activity.
As well as this, each EU Member State needs to improve their operational and analysis capabilities. The pace at which each state reacts to the flagging of anomalous results needs to improve if action will be taken effectively. At present, many member states do not have the technical means required to enable them to bring together external data. Some member states must also grow the amount of information they are gathering from traders. VAT receipts, for example, could be collated in a machine-readable format which would improve data collection.
VAT Carousel fraud has so far proved difficult for EU Member States to combat. If we are to prevent criminals benefiting at the expense of the taxpayer, we will need a pan-European, multi-pronged approach. The amount of information gathered and collated about company and trade accounts must increase, and we also need to make use of innovative technologies which will facilitate the garnering of actionable insights from the vast amounts of data collected. Only by enacting such a systematic approach will be truly be able to tackle this crime.
