EU cops swoop on used phone £16 million marginal VAT fraudsters

The European Public Prosecutor’s Office (EPPO) has carried out 25 raids in six countries targeting a suspected £16 million VAT fraud involving used mobile phones imported from Hong Kong, the United Arab Emirates (UAE) and the United States.

The EPPO is the independent public prosecution office of the European Union. It?is responsible for investigating, prosecuting and bringing to judgment crimes against the financial interests of the EU.

Code-named ‘Concertina’, the investigation, led by the EPPO in Munich stretches across Bulgaria, Germany, Italy, Malta, the Netherlands and Slovenia. During the searches, a large number of documents, electronic devices and evidence were seized, as well as £27,000 in cash Euros and cryptocurrency worth roughly £34, 000. Several bank accounts were frozen, with at least £76,000 seized so far.

It follows a suspected criminal scheme whereby companies in several EU Member States, fraudulently applied reduced VAT to the sale of second-hand mobile phones imported from the United States and other non-EU countries, in order to illegally increase their profits.

When selling second-hand goods bought from private persons in the EU, or from sellers who have already paid VAT in full for such items, the reseller may apply the so-called ‘margin taxation’ scheme and only has to pay VAT on the profit margin and not on the full sale price of the item.

However, it is suspected that the companies under investigation charged reduced VAT when the full rate was due. The suspected fraud also allowed mobile phones to be sold at a lower market price, thus causing unfair competition.

Companies under investigation charged reduced VAT when the full rate was due.

Four suspects

Between 2019 and 2022, four suspects worked together to defraud Bulgarian, German and Slovenian tax authorities of the VAT due on used smartphones imported from the US and other countries, by setting up a chain of companies engaged in a seemingly legitimate intra-community delivery of goods, in triangular transactions exempt of VAT until the final destination.

It is understood that they took advantage of the fact that several national authorities were involved along the chain of transactions, to knowingly dissimulate the eventual switch to margin taxation – despite knowing that the requirements for the application of this taxation were clearly not met.  

The companies involved in the suspected fraud are located in Bulgaria, Germany and Slovenia, and are managed by the four individuals under investigation.

]The company in Slovenia bought the smartphones from companies in Hong Kong, the UAE and the US, and then sold them to the company in Bulgaria. 

The goods were then sold to the company under investigation in Germany at a VAT margin rate. The same rate was applied when the goods were sold to final customers in Italy, Finland, Poland and Sweden.

They are suspected of having defrauded the payment of VAT in Bulgaria, Germany and Slovenia, with an estimated damage of at least €19 million. It is understood that some of the illicit profits may have been concealed in bank accounts and assets in other Member States.

Tax expert Martin O’Neill, tax litigation and disputes partner at Keystone Law commendted “Margin schemes allow for favourable VAT treatment to companies buying and selling second life goods and their correct use can substantially reduce a trader’s VAT liability. It is for this reason that that there are strict rules for the goods that can be traded on margin and why the scheme is monitored by tax authorities.

“It has been suspected for some years that there was widespread abuse of the VAT margin schemes in the UK and the EU, particularly companies that misuse margin schemes or otherwise become duped or misled into purchasing consignments of non-qualifying stock using margin schemes and exposing themselves to large financial losses. 

“The market for used/returned/refurbished mobile phones has boomed in recent years. Advances in handset technology, increased longevity of designs and the rising costs of new handsets has all contributed to this growing market segment. Latest estimates showed global sales of used mobile phones in just Q1 2023 in excess of $13 billion. 

“Given the size and profitability of the market, the searches that took place under warrant earlier today are likely to only be the start of tax authorities’ enforcement action in this matter.  Investigation teams of tax authorities across the UK and mainland Europe are likely to follow the leads identified in these searches and raise VAT assessments for the misuse of VAT margin schemes.”

The EPPO’s Annual Report for 2022 highlighted its focus on EU fraud affecting public revenue, with a particular emphasis on cross-border VAT fraud. By the end of 2022, the EPPO had 1,117 active investigations, with overall estimated damages amounting to €14.1 billion. A significant portion of these investigations (47%) resulted from VAT fraud, highlighting the scale and impact of this type of criminal activity on EU finances