Pharma companies must safeguard against VAT fraud, says PwC Legal

Pharma and medical supply companies have been earmarked by HMRC as a potential target for VAT fraud, but many are not yet attuned to the risk, warn experts at PwC Legal.

This type of fraud can quickly spiral out of control and companies should be on high alert.

So-called missing trader fraud has previously been seen in the mobile phone, electronics and carbon credit markets, but HMRC believes pharma and medical supplies might now be a target. The scam typically involves small, high value goods which can be imported easily, and where counterfeits are common. There have already been cases detected in the sector involving urine testing strips and razor blades.

The fraud exploits gaps in the VAT system

The fraud exploits gaps in the VAT system across the EU. In its simplest form, a fraudster will import goods VAT free, sell them on with VAT, but then disappear before paying the VAT to the tax authority. This has spawned a more sophisticated version, where organised gangs create a false market which may result in the same goods being traded many times over. Sometimes legitimate businesses are unwittingly put into the chain, making the fraud harder to detect and leaving the VAT liability with the business. Fraudsters may even infiltrate a business, helping to further cover the tracks.

Andy Brown, partner at PwC Legal, commented, “Like a disease, missing trader fraud mutates each time the tax authorities stamp out one type. Once it infiltrates a sector the fraud can spread rapidly. Pharma companies would be wise to discuss the potential risks with HMRC now so they can safeguard their business. If a business finds itself unwittingly caught up in the fraud, it can be hard to untangle itself. The costs could be significant.”