COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 03.09.1998 
COM(1998) 490 final 
REPORT FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
VAT Collection and Control Procedures 
applied in the Member States 
Third Commission Report 
[Article 12 of Regulation (EEC, Euratom) No 1553/89] 

CONTENTS 
1. INTRODUCTION. 1 ou 
2. FRAUD AND IRREGULARITIES 2 
2.1 Fraud types 3 
2.2 The risk sectors 5 
3. CONTROL 6 
3.1 Background and definition 6 
3.2 Control: a basic deterrent to fraud 6 
3.3 The management of control : 8 
3.3.1 , Risk analysis 8 
3.3.2 Ways of preventing fraud 11 
3.4 Control and investigation methods 12 
3.4.1 Control techniques 12 
3.4.2 Sectoral approach 13 
3.4.3 Powers of control 15 
3.4.4 Investigations into organised fraud 16 
3.5 Recovery 17 
4. CONCLUSIONS : 19 
A 
1. INTRODUCTION 
Article 12(3) of Regulation (EEC) No 1553/891 states that "the Commission shall 
produce a report every three years on the procedures applied in the Member States 
and on any improvements contemplated". 
This report is the third one produced by the Commission: the first was published in 
1992 and the second in 1995.2 
In recent years, the various authorities which deal with VAT management 
procedures have focused their attention in particular on the problems connected with 
the activities of controlling and combating fraud. 
The interests at stake are very important: VAT is the main source of revenue for the 
Community budget, although its'relative share is falling steadily. It also represents 
one of the most important sources of revenue for the Member States. It was already 
stressed in the second report that a revenue shortfall and, therefore, a shortfall of the 
VAT resource, had to be offset by an additional call on the GNP resource, thus 
altering the relative shares of the VAT and the GNP resources. The additional call 
on the GNP resource is financed by all the Member States. Lack of efficiency in 
collecting VAT in just one Member State has an impact on the other Member States. 
The Member States and the Commission are therefore obliged to pay close attention 
to the development of fraud, and to promote measures to improve and enhance the 
prevention of and the fight against tax fraud. 
No categorical conclusions can be drawn on tax fraud - in particular in terms of 
quantity - but the information available does nevertheless give some clue as to the 
scale and importance of fraud, and indicates certain general principles for combating 
it. 
After a brief survey of the basic features of VAT fraud today, the report summarises 
the experiences and the basic principles underlying control systems and describes 
how they are moving towards finding solutions which will improve and enhance the 
methods of combating a problem which attacks the very integrity of the VAT 
system at Community and national levels. 
In dealing with the VAT collection and control procedures applied in the 
Member States, this report takes account of a wide range of work and activities 
which have been carried out by various bodies. 
1 Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989, OJ L 155 pp 9-13, 7.12.1989. 
2 The first report (SEC(92)280 final) was produced in February 1992; the second (COM(95)354 final) 
was published in July 1995. 
Of these activities, the main sources for drafting this report have been: 
1. the VAT seminars organised by the Commission3 in response to the Second 
Article 12 Report recommendations on setting up special programmes to tackle 
the most relevant risks; their conclusions are given in detail in the specific 
working document; 
2. the work of the Committees provided for by Regulation (EEC) No 219/924 
(SCAC and SCAF); 
3. the seminars organised under the Matthaeus Tax programme.5 
2. FRAUD AND IRREGULARITIES 
Any reference to combating fraud implies that at least basic information is available 
concerning the problem facing the national supervisory services. But, in the case of 
tax fraud, it is first necessary to clarify the coverage of the word "fraud", mainly 
because of the different definitions used in the Member States6 and difficulties of a 
linguistic nature (one example will suffice: "evasion" in English indicates illegal 
non-payment of tax, whereas "évasion" in French corresponds to "avoidance" in 
English). 
In this report, fraud means any activity which, in direct breach of the law or through 
unlawful abuse of such standards, leads to a deliberate evasion of proper compliance 
- with tax obligations, and consequently, to the non-taxation of any taxable amount 
and/or to non-payment of tax. 
Since tax systems are generally based on a number of obligations (registration of the 
taxable person, keeping of accounts, invoicing, returns, etc.), the main purpose of 
which is to prevent fraudulent behaviour (potential or probable), the form and 
content of tax fraud differs and its seriousness varies widely, from the simple failure 
to comply with formal obligations to criminal acts of "suppression", forgery, 
concealment, etc. 
"VAT control and audit procedures in high risk sectors" (construction, retail trade, hotels, 
restaurants, cafés), Helsinki, 8 and 9 June 1995; "Control and audit problems in the car sector", 
Brussels, 11 and 12 December 1995; "VAT collection and control of phoenix companies, shadow 
companies, and companies involved in the use of contrived insolvencies", Vienna, 13 and 
14 June 1996. 
Council Regulation (EEC) No 218/92 of 27 January 1992, OJ L 24, 1 February 1992. Article 10(1) 
provides that the Commission shall be assisted by a Standing Committee on Administrative 
Cooperation in the field of Indirect Taxation (SCAC) within which an "Anti-Fraud Sub-Committee" 
(SCAF) has been established to deal more directly with questions connected with tax fraud and the 
fight against such fraud. 
In particular the following Matthaeus Tax seminars: 
"VAT control and the textile sector", Crawley, United Kingdom, October 1995; 
"Computer audit for VAT control", Malmô, Sweden, February 1996; 
"Invoice control and invoice-related fraud", Madrid, Spain, December 1996; 
"Planning VAT control and audit", Luxembourg, September 1997. 
See Annex 16 to the Second Article 12 Report. 
Leaving aside cases of petty irregularities or errors (which nevertheless, taken 
together, can generate substantial tax losses for the Treasury), the following 
paragraphs concentrate on the activities which are designed to obtain an improper 
tax advantage (by the unlawful diminution of the taxable amount). 
Because of the way VAT actually works, we find that fraud is generally aimed at 
reducing or suppressing the tax owed on sales and/or at increasing or creating a 
deductible tax on purchases, so as to "distort" the final (debit or credit) tax balance. 
2.1 Fraud types 
The methods of achieving fraudulent results may be fairly simple, e.g. the 
non-invoicing of sales or the deduction of non-deductible purchases, but may also 
be the result of more complex activities (creation of false tax subjects, abuse of 
special taxation schemes, abuse of the rules of international trade, etc.), or may even 
involve several taxable persons, as in cases of "carousel" frauds. 
According to the information available, in particular the study carried out by the 
Anti-Fraud Sub-Committee (SCAF),7 the following points can be made about VAT 
fraud: 
1. The principles underlying the transitional arrangements (in particular the exempt 
movement of goods in intra-Community trade) have facilitated or increased 
certain types of fraud. The three special sets of arrangements under which tax is 
levied at the place of destination (new cars, distance sales, .purchases by 
non-taxable legal persons and exempt taxable persons) are also complex and 
difficult to monitor; this opens the way for abuse or types of fraud which did not 
previously exist. 
2. the most frequent types of fraud are the "suppression" of output tax and the abuse 
of deduction rules, in their simplest and most direct forms (in the SCAF study 
they account for 57% of the sample concerned). On the sales side, this fraud is 
represented by failure to issue invoices, no registration of sales, non-payment of 
the invoiced VAT; on the purchases side, the most frequent fraud is deduction 
without any evidence of an invoice (increase in the deductible VAT declared) and 
deduction by use of falsified invoices; the latter fraud uses a wide range of 
mechanisms, with fraudsters continually seeking new control-proof systems: 
falsified invoices of true companies (copies, composite photographs, etc.), 
creation of invoices from non-existent suppliers and for fictitious goods, creation 
of invoices from genuine suppliers who know nothing about the transaction, 
double use of the same invoices appropriately amended, etc.; 
3. the types of fraud which generate the highest amounts of evaded tax for each case 
are those which are referred to in this report as "major organised fraud" i.e.: 
The SCAF has, inter alia, carried out a full study on VAT fraud in Europe. It covers 479 fraud cases 
(chosen by the Member States from among the most important in terms of amounts evaded and fraud 
mechanisms) representing in total evaded tax of ECU 573 million. The examination of these cases is 
particularly detailed and it is based on several parameters (information on the taxable person, fraud 
types and mechanisms, detection method, cooperation, etc.) which give a significant overview. 
(a) the creation of bogus companies or entities (which are known by a variety of 
names8) with the sole aim of evading the tax due by means of a variety of 
mechanisms (creation of new companies which operate lawfully but which 
disappear before the first date for submitting returns and paying the tax, or 
after obtaining refunds on the basis of fictitious activities or false documents, 
the disposal of assets before contriving insolvency to escape the payment of 
taxes, the creation of customers/suppliers to simulate transactions, etc.); such 
false tax subjects are found at both domestic and international level; 
(b) "carousel" fraud, in which commercial transactions are carried out by a chain 
of companies (real or fictitious) with a view to obtaining, for each company 
involved, a number of improper VAT advantages (improper deduction or 
refund) and, at the same time, covering the tracks of goods (real or fictitious) 
which are finally declared for export but which in reality are sold on the black 
market. These types of fraud are connected with international and 
intra-Community trade for two main reasons: 
(i) the system of taxation at destination enables fraudsters to take 
advantage of the exemption from VAT for intra-Community 
supplies or for exports; 
(ii) the greater difficulties of the tax administrations in detecting 
fraudulent schemes "organised" abroad. 
4. some of the other most frequent types of fraud are: 
(a) failure to register (the administration is unaware of the activity conducted and 
it therefore forms part of the underground economy); 
(b) application of the wrong VAT rates; 
(c) the abuse of intra-Community and import/export rules; 
(d) contrived insolvencies (a company disposes of its assets before going into 
insolvency to escape payment of VAT due). 
5. limited to the sample studied by the SCAF, other interesting inferences, in 
particular for control and risk analysis (see Chapter 3), can be drawn; 
(a) a very small percentage of traders were totally unknown to the tax authorities 
(traders not identified for VAT) at the time when the fraud was detected; 
(b) the (voluntary) deregistration of taxable persons is often close to the year of 
fraud; 
(c) almost half the taxable persons involved in carousel fraud or fictitious 
companies were registered after 1992; 
(d) most of the taxable persons had less than 5 employees and 20% were sole 
traders. 
A variety of names are used to describe this type of company which is created for fraudulent ends but 
which at the same time has to look like a normal company: phoenix companies, front companies, 
ghost companies, taxi companies, dormant companies, filter companies, letter-box companies, etc. 
2.2 The risk sectors 
Since fraud is an activity which is continually adapting to the different situations in 
which it operates and which always tries to take advantage of new ones, it appears in 
many guises. Fraud mechanisms change and adapt in response to several factors, 
such as the sector involved (construction, clothing and textiles, motor car sales, 
hotels/restaurants/cafes), the type of activity (production, retailing or wholesaling, 
services, large-scale distributive trades, etc.), and the legal designation and nature of 
the taxable person.9 Nevertheless, it is possible to identify certain sectors which 
seem to be more exposed to the risk of fraud. 
The construction industry is considered to be a high-risk sector, because of its size 
and the mobility of traders, which make it difficult to control. One of the main 
features of the construction industry, which includes the maintenance of property 
and all other activities complementary to construction, is the failure to register and 
the suppression of the tax on supplies of goods and services, in particular by 
individual small or micro firms whose customers are private individuals. Three 
methods have been developed to camouflage receipts and undeclared turnover: 
• work "in the black" which is attractive to customers who are not taxable persons 
because of the price discount offered (generally tempting for customers who in 
any case are not entitled to apply for VAT refunds); 
• manipulation by means of subcontractors (including falsified invoices for 
fictitious transactions, non-itemised or non-transparent invoices, use of 
subcontractors by non-resident companies without registering for VAT); 
• manipulation by means of the equipment used and the prices charged (e.g. 
discounts on purchases not recorded in the accounts, fictitious inventories, claims 
and thefts). 
The non-declaration of sales and the suppression of the corresponding VAT is 
frequent throughout the retail trade, in which there are a large number of traders, a 
huge number of small transactions, cash payments, and customers who are 
particularly sensitive to the final price, irrespective of the VAT. But the situation is 
not the same throughout the category: distinctions have to be drawn on the basis, for 
example, of the vendor's sales structure (large stores or small shops) or the type of 
goods (goods for which the purchasers ask for the sale to be recorded or for a 
supporting document for non-tax reasons, such as being eligible for the guarantee). 
A widespread fraud in the retail trade consists of the manipulation of rates: this type 
of fraud is particularly pronounced in the "HORECA" sector (HOtels, REstaurants, 
CAfes), especially in the Member States which apply different rates for supplies of 
goods (take away meals) and supplies of services (meals consumed in situ). The 
failure to keep accounts in particular concerns itinerant traders, seasonal trade and 
the trade in second-hand cars. 
The wholesale trade is particularly exposed to "major organised fraud" (false tax 
subjects, carousel fraud, etc.) because its purpose is to provide goods which are 
"tax-free" and consequently at more competitive prices on the market. These frauds 
are sometimes on a very large scale and can even cause real distortions of 
The decision-making process of an individual firm differs from that of a public limited company 
which has management and supervisory departments within its structure). 
competition. Some very important cases at Community level have been detected in 
the following sectors: wholesaling of meat and live animals, textiles, portable 
telephones, audio-visual equipment and motor vehicles, and electronic components, 
which are very high value added, easily transportable goods. 
Motor car sales are particularly vulnerable to fraud. The differences between VAT 
rates and prices on the national markets, and the relatively high level of the 
investment for purchasers, make it worthwhile for fraudsters to devise schemes with 
the aim of shifting the place of taxation. The sector is also affected by serious 
carousel fraud (three refunds of VAT on the same vehicle'can be enough to cover its 
total cost). 
3. CONTROL 
3.1 Background and definition 
The Member States' various control systems stem from different experiences and a 
variety of factors such as organisation10 and administrative procedures, the 
legislative framework,11 technical equipment, the structure of the Member States' 
economic and social fabric, etc. 
Nevertheless the experiences of the Member States in control mean that certain 
general principles can be identified which should guide them in their efforts to 
improve the effectiveness of control methods and to adapt their procedures more 
closely to a rapidly evolving situation. 
The activities taken into account in this report are not merely verification procedures 
as such (on-site inspection, investigations, etc.), but cover a broader range of earlier 
activities (prevention, risk analysis, planning, setting of priorities and other activities 
designed to increase the level of voluntary compliance), and subsequent activities 
(actual recovery of the adjusted tax, which is the natural corollary of control and 
fundamental for guaranteeing the deterrent effect, and evaluation of the performance 
of administrative action). 
3.2 Control: a basic deterrent to fraud 
The obligation to pay tax has always conflicted with the individual's interest in 
being able to keep as much as possible of the income and wealth produced by his 
work net of taxes, in an eternal opposition between the interests of taxpayers and 
those of the tax authorities. But today, a broadly accepted principle in relation to 
10 Some Member States have integrated their VAT control functions with those of other taxes or closely 
aligned them on those taxes, e.g. direct taxes, taxes collected by means of assessment books, excise 
and customs duties. This can facilitate the detection of any VAT fraud that stems from fraud in other 
sectors. The administration of VAT is increasingly integrated with that of direct taxes in most 
Member States, as indicated in the earlier Article 12 reports. 
11 The current system is marked by wide differences in the application of the VAT rules in the 
Member States. 
taxation is that the key purpose of every tax system is to promote voluntary 
compliance12 with tax obligations, namely self-assessment, declaration and correct 
payment of the tax without first being subject to administrative control. The basic 
idea is the existence of an implicit "contract" under which the taxable person pays 
his taxes and the State provides quality services, including the efficient detection of 
taxable persons who do not comply with their obligations. 
The decision to commit fraud can be partly but not exclusively related to the 
likelihood of detection,13 i.e. the nature and severity of sanctions. In any event, tax 
control, or rather the risk of a tax control, remains a fundamental deterrent in order 
to maintain an acceptable level of compliance with tax obligations and consequently 
of revenue. 
If the problems of tax fraud are to be approached properly the possibility of being 
detected must therefore become a "virtual certainty" and control procedures must be 
reliable and effective (and accompanied by really fair and deterrent penalties14 and 
by efficient and rapid disputes procedures). 
Faced with a very large population of taxable persons, a growing number of returns, 
and limited resources, the authorities have to select those taxable persons which are 
to be controlled. This involves two stages: 
1. first, an acceptable rate of coverage for inspections must be decided (percentage 
of taxable persons inspected during the reference period). What must not be 
allowed to happen is for verifications to be reduced to perfunctory, purely formal 
controls as a result of an increase in their frequency (e.g. to inspect all taxable 
persons every two years).15 Such a system would sharply reduce the deterrent 
12 It must be pointed out that the recommendations which follow will not fill all the gaps in the 
frequently very complex mechanisms of the VAT system and that only new VAT arrangements based 
on the principles set out in the Commission's work programme (A common system of VAT - a 
programme for the single market (COM(96) 328 final)) will significantly improve voluntary 
compliance with obligations and the controllability of the system. 
13 In fact, a variety of complex factors influence the non-compliance decision. For example, from an 
economic point of view, the amount which might possibly be involved, in the future, if this fraud were 
detected determines whether the immediate benefit of the fraud is acceptable. Other obstacles to 
voluntary compliance may be the general pressure of taxation, the complexity and fairness of the 
taxation system, the relations between the tax authorities and taxable persons, the weaknesses of 
control and sanctions, and the perception of how the public authorities use taxes. 
14 The Matthaeus Tax seminar "Sanctions applicable in the field of VAT", Viterbo, Italy, 
December 1996, stressed the role of the system of sanctions (which should be flexible, effective and 
proportionate) in order to encourage taxpayers to fulfil their obligations spontaneously. 
15 The problem is more complex since it concerns the general principles underlying the control system 
and in particular the methods of control adopted. The average length of an inspection and therefore 
the number of them, assuming that there is no change in the resources available, is heavily influenced 
by whether or not they are combined with the control of direct taxes, the period taken into account 
(one or more years), the thoroughness of checks, the physical controls of stocks, accounting analyses, 
formal controls, and so on. This is why some Member States have developed flexible procedures with 
the aim of optimising the use of resources by tailoring the method and the thoroughness of the 
inspection to the particular case. 
effect of the inspection, in particular as regards frauds which can be detected only 
by more thorough inspections; 
2. Once the number of taxable persons to be controlled has been decided, it is 
necessary to determine those who should actually be controlled and which 
priority should be used. The better the choice, the more effective the control 
action will be: traders must be made to feel that it is "virtually certain" that the 
fraud will be detected. The choice is mainly influenced by risk analysis which, 
by defining certain tax "risk" indicators, allows the administration to target its 
efforts and define control priorities. 
Moreover, the effectiveness of the control is not measured solely in terms of the 
number of taxable persons actually controlled, but also by its multiplier effect: 
traders who follow the rules are bound to welcome a control which restores the 
fairness of taxation and the conditions of fair competition, which are upset by fraud; 
fraudsters (and potential new fraudsters from the same sector, or the same region or 
town) will become more aware of the vigilance exercised by the authorities and the 
risk that their frauds will be detected. This explains why an accurate evaluation of 
the effectiveness of control should go beyond the mere sums involved in the fraud 
detected and attempt to take account of the deterrent effect. 
Several national administrations widely publicise their control activity and in 
particular the results obtained. 
In conclusion, the Commission feels that in the present situation all the 
administrations of the Member States must undertake to attain the following two 
objectives: 
to maximise voluntary compliance with tax obligations; 
to enhance the deterrent effect of control, which means increasing the 
perception that fraud is "virtually certain" to be detected; the key elements 
in this objective are the selection of taxable persons on the basis of risk 
parameters, and the multiplier effect of action which is genuinely and visibly 
effective and efficient. 
3.3 The management of control 
3.3.1 Risk analysis 
The purpose of risk analysis is to determine the indicators which can improve the 
targeting of controls and to put them in order of priority. The Member States are 
making increasing use of risk analysis and of the other analytical techniques which 
enable them to determine in advance where fraud is most likely to be found and 
therefore to establish an order of priority for control activities. 
This means the systematic and organised collection of all available information so as 
to determine the general reference framework and the risk indicators. As regards 
sectors, analysis is based on macroeconomic data (markets, commercial flows, 
imports, etc.), refined and completed by data concerning the traders in the sector 
(size, organisation, net worth, turnover, economic and financial situation, etc.). It is 
desirable to have an overall assessment of the risks at the same level of fraud 
(regional, local, etc.) so as to target the use of resources in the most effective way. 
The analysis can also be completed by any other information: registration, 
examination of tax returns, control results,16 cross-checking of tax data with that 
from other sources (professional associations, social security organisations), etc. 
The dissemination of results to the peripheral levels and/or the inspection offices 
enables the detailed information available for individuals to be supplemented: as a 
rule, any information directly or indirectly concerning each taxable person should be 
collected and kept in an individual file established by that person's inspecting 
department. 
Inspection results are certainly the most important source of information since - in 
particular in the case of VAT - irregularities concerning transactions are bound to 
have repercussions for suppliers and customers (taxable persons). Other important 
facts at individual level may be refund requests, the particulars on recapitulative 
statements of intra-Community trade, licences and administrative authorisations, 
newspaper announcements and publicity offers, etc. 
When establishing risk elements the attention of tax inspectors is also drawn to 
certain points deserving special vigilance, such as: 
• trading activity in high value added, easily transportable goods (electronic 
components), or in sectors where there is a high likelihood of carousel fraud; 
• companies generating huge sales after only a short period of trading or only 
reduced or non-existent activity, and ceasing to trade just as suddenly; 
• companies declaring a high level of sales, but without the corresponding 
production facilities. In this case, as in the previous one, it can be assumed that 
these activities are entirely bogus, but result in the issue of invoices which their 
clients will use to obtain an unjustified VAT deduction or refund;17 
• companies managed by persons with the profile of men of straw (persons who are 
too young or too old, poor, with criminal records, etc.); 
• origin of the possession of the company assets and "history" of the company and 
its directors. In this case it is necessary, for example, to check whether the 
company structure has emerged from another phoenix company (whose name or 
trade name has simply been changed) or whether directors, managers, etc. have 
been involved in previous fraud cases; 
16 The SCAF fraud study demonstrated that a good system for recording fraud information is an essential 
tool which is very important for analysing the operation of the system itself, and for evaluating the 
reasons for fraud. The heterogeneous structure of national recording systems means that it is very 
difficult to obtain a general picture of the fraud situation in the Community. 
17 In the two cases referred to above, the high level of company activities, although recent and conducted 
over a short period, may be real but stimulated by the increased competitiveness obtained throughout 
the commercial chain because of the improper VAT advantages (reduction in cost prices and sales 
prices). 
• applications for large VAT repayments, in particular when the applicant is an 
exporter or is supplying goods within the Community. 
The availability of several sources of intelligence and their exploitation by computer 
is of paramount importance in this area18 and most of the national administrations 
possess and/or are developing technical equipment and the necessary computer 
programmes.19 All these data have to be recorded in appropriate data banks and 
compared in order to determine the trends in sectors and fraud risk indicators. Some 
Member States have set up tax intelligence departments which collect all 
information possible from any available source (from the data held by government 
bodies to anonymous calls) and centralise it in a single department which examines, 
evaluates, sorts, stores and distributes it. 
Some Member States have set up special information networks which concentrate 
on tracking traders involved in earlier frauds, information about which is widely 
disseminated throughout the national tax administration. One Member State has set 
up a system which assigns to persons previously involved in certain frauds a unique 
identification number under which all relevant information concerning their 
business and professional activities is recorded. Other data bases relate to firms 
which have issued or used falsified invoices, and fictitious companies created 
explicitly for fraudulent purposes. 
The targeting of inspections on the basis of certain parameters should be 
supplemented by random audits. As a result, first, the validity of the criteria used 
would be verified and enhanced and, second, taxable persons would not feel that 
they were protected from inspection merely because they were "artificially" outside 
the risk parameters. 
The Commission considers that the basic elements of a risk analysis system which 
can ensure the effectiveness of control are therefore: 
the development of and rapid access to all sources of relevant information, 
from tax and non-tax sources, so that they can be collected, exploited and 
disseminated; 
a specialised department to analyse and refine the information; 
the provision to all operational and control departments of risk analysis 
systems and warning systems on known or suspected fraud, so that potential 
risk traders can be kept under rapid and permanent surveillance; 
the maintenance of an appropriate percentage of random audits. 
18 This need was made very clear at the joint OECD/HM Customs & Excise Conference "Information 
and intelligence systems in the field of indirect taxes", Gatwick, United Kingdom, 17-19 March 1997. 
The SCAF study confirms the usefulness of such external intelligence: cooperation with other 
administrations or departments (national or foreign) for purposes of tax control was indicated in a 
quarter of the cases. 
19 The conclusions of the Malmô Matthaeus Tax seminar leave no doubt as to the fact that computer 
audit techniques will become increasingly important for the detection of fraud. 
10 
3.3.2 Ways of preventing fraud 
The Member States are devoting increasing attention to fraud prevention by the 
systematic collection of data which can be used to establish fraud risk evaluation 
indicators. 
The registration of a new taxable person20 is an important moment for prevention 
since it provides an opportunity for establishing initial contact with traders to inform 
them of their obligations, to collect important information for the data bases on 
taxable persons and to complete the risk analysis. The population of European firms 
is very varied and volatile because it is mainly composed of frequently changing, 
very small units, which require close and constant monitoring from the 
administrations. 
Depending on the Member State, registration can give rise to systematic controls or 
just to information visits. Some Member States make "educational visits" to advise 
newly established traders of their rights and obligations, and also to assess the 
potential tax at risk. 
In general the data recorded is electronically available and accessible to all the 
national offices, but the registration procedures and information requested vary 
widely according to the Member States, in particular as regards the amount and type 
of particulars. 
The preventive role of registration may become crucial in cases of fraudulent 
schemes based on phoenix companies. In such cases, registration may help to make 
it more difficult to create and use this type of company. Registration can be made 
subject to the payment of a security, in particular in cases where the authorities have 
doubts as to whether activities are genuine, or a higher minimum amount of starting 
capital can be required; in the case of contrived bankruptcies, directors who, in the 
past, have wound up their companies on one or more occasions may face stricter 
conditions under common law for setting up a new company, such as the provision 
of a guarantee. 
Some Member States require the provision of minimum information on their 
activities from inactive companies whereas other States have them deleted from the 
register. 
The Member States who implement such measures (not always permitted by law) 
nevertheless stress the inherent risks they involve for the free creation of businesses 
and the fact that too strict a registration system would deter traders from leaving the 
underground economy. 
A further key aspect of VAT fraud prevention is careful checking of VAT refund 
applications, not only in the case of new taxpayers but also for all other VAT refund 
claims. One Member State has developed a strategy for checking the entire chain of 
enterprises back to the initial phase where a substantial amount of deductible VAT 
is claimed. The taxpayer in question is asked to produce invoices, which are 
checked by computer to establish whether the traders who issued them are 
20 These arguments were developed and expanded at the Matthaeus Tax Seminar "Registration and 
deregistration" held in Athens in June 1997. 
11 
registered. If a non-registered trader is discovered, an inspection visit aimed at 
acquiring further information is carried out. 
The Commission therefore stresses that: 
with a view to making control more effective, the registration of taxable 
persons is important for voluntary compliance and in order to improve 
prevention, and is a key element in risk analysis. 
a system of checking the chain of companies or transactions be used to detect 
any improper VAT refund claims. 
3.4 Control and investigation methods 
3.4.1 Control techniques 
As a rule, the purpose of control is to check whether the tax has been accurately 
assessed, and whether the activity conducted corresponds to the one which has been 
declared. This involves a range of research on compliance with legal obligations 
(invoicing, deduction, registration, keeping of accounts, returns, payment, etc.) and 
checks on whether the accounts correspond to economic reality (verification of 
stocks, did the transactions recorded really exist? do they really have anything to do 
with the taxable person's activity? do sales match productive capacity? etc.). 
Techniques may be based on internal research (monitoring of compliance with tax 
obligations, checking accounts, examining the conditions in which the firm is run, 
etc.). and external research, which is based on the use of any information available 
elsewhere than in the firm itself so as to be able to check whether the real activity 
corresponds with the one recorded in the accounts. For example, the cross-checking 
of invoices with customers/suppliers or with public or private bodies (see point 
3.4.4.) is an external technique which is widely used because of its effectiveness in 
detecting falsified invoices, the abuse of the right to deduct and the suppression of 
the tax on sales. 
The relationship between the two types of research and their content and direction 
depends on the situation found in each case, but first and foremost it is connected 
with the nature of the taxable person under examination, namely whether he is a 
"true taxable person" or a "false taxable person" that was created with the sole 
purpose of committing fraud. A concealment of activity cannot be detected just by 
examining accounts and returns (possibly) signed, or by internal research on a 
structure which is virtually non-existent. In this case inspectors are faced with a 
much more vague and indefinite reality (no registered office or no fixed place of 
business, no accounts, difficulty in finding the real people in charge/directors, etc.) 
which becomes more difficult to reconstruct and to verify after the event, i.e. after a 
lapse of time. 
Tax audits have proved to be the most effective procedure for observing and really 
verifying the genuineness of the taxable person and for comparing this with 
accounting documents. It becomes indispensable to verify the actual situation 
directly whenever control requires the verification of stocks or flows of goods (in 
particular to establish the turnover of retail businesses whose takings are mainly in 
the form of cash). According to the experience of one Member State, the yield from 
documentary control is half that from tax audits, particularly in the case of VAT. 
12 
The checking of invoices is one of the priority controls: the invoice is one of the key 
elements in the accounts, representing the formal proof of activity and the basis 
underlying the accounts. A thorough analysis of this aspect21 shows the desirability 
of concentrating on forms of controlling selected invoices (on the basis of risk 
analysis or other criteria) instead of the systematic control of all invoices. 
One Member State has experimented with a new form of control designed to 
monitor the degree of compliance with tax obligations by on-site observation: the 
business is informed of an impending control visit (but not of the exact date), and on 
arrival at the trader's premises the controllers collect several types of information 
(including data on employees) which will later be compared with that shown in the 
periodic returns. The likelihood of irregularities can thus be assessed and prompt 
action can be taken. The results obtained by this technique are reflected in the fact 
that such visits now comprise 10% of all visits to taxable persons. 
Several Member States have developed specific VAT controls based on rapid and 
immediate visits; others pay prompt attention to the control of companies which 
trade over a short period. 
Most of the Member States are making increased use of intra-Community 
cooperation.22 Directive 77/799/EEC on mutual assistance and Regulation (EEC) 
No 218/92 on cooperation offer a variety of possibilities for exchanges and 
information: assistance on request, spontaneous or automatic, interrogating the 
VIES system and "Article 5" requests (requests for information on specific 
transactions), and direct contacts between competent authorities or other 
departments delegated by the latter, in cases of bilateral interest. 
In conclusion, the Commission suggests that: 
preference should be given to control procedures based on on-site 
observation because they have proved more effective for a full and 
exhaustive assessment of the activity really carried on by the taxable 
persons; 
control procedures should be flexible enough to adapt to the various control 
requirements, so that specific VAT problems can be dealt with immediately 
and rapidly; 
systematic and increased use be made of the opportunities provided by 
current legislation on administrative cooperation between Member States. 
3.4.2 Sectoral approach 
Some Member States have developed specific control programmes and methods based on 
a sectoral approach. They vary according to a number of factors, such as the sector being 
21 Matthaeus Tax seminar, "Invoice control and invoice-related fraud", Madrid, December 1996. 
22 See the Commission's first two reports pursuant to Article 14 of Regulation (EEC) No 218/92 
[COM (94)262 final, of 23 June 1994 and COM(96) 681 final, 8 January 1997]. 
13 
controlled, the size of the firm and the nature of the taxable person (industry, agriculture, 
liberal profession). 
Experience shows that such an approach: 
• enables inspectors to acquire a thorough knowledge of the machinery and specific 
features of the sector and, therefore, the latest developments and trends in fraud; the 
control procedures are particularly well-adapted and refined; 
• makes it easier to collect specific data for risk analysis and prevention purposes and, at 
the same time, to check the validity of previous analyses and the results already 
obtained; 
• enables stricter relations to be established between the representatives of the sector 
and the administration. 
This approach enabled one Member State to uncover 30% more irregularities in the car 
industry in the 1994-95 period. 
To assist with these measures, some Member States issue audit guides, handbooks or 
monographs summarising and explaining current practices in the sector which may be of 
interest to investigators: market trends, standard margins, modus operandi, specific 
accounting documents, output, working procedures, the percentage of wastage, etc. 
These guides and handbooks should be available on-line and constantly updated to 
include the latest developments. Some Member States organise training courses or issue 
newsletters to keep their control departments up-to-date. 
Some very important information requiring distribution relates to the practical means of 
detecting certain types of fraud, e.g.: 
• indicators which have made it possible to identify false invoices (poor-quality paper, 
vague details in addresses, telephone numbers, etc., photocopied or hand-written 
invoices, constant use of round figures, etc.); 
• analyses of the flow of goods and cash in order to check for the incorrect application 
of VAT rates in the case of large retailers. 
Increasing use is being made of specialist units to carry out controls on account of the 
specific characteristics of the taxable persons operating in these areas. Such units 
endeavour, in collaboration with all the departments concerned, to control the entire 
commercial chain concerned. 
If controls on very large firms and/or multinationals are to be efficient, administrations 
must try to adapt their procedures to the real situation prevailing in these circles. The 
complexity of company structures (which are often spread out over a number of sites and 
in several Member States) and of their accounting and financial-control systems, their 
degree of computerisation, the amount of tax involved and the scale on which tax 
avoidance is perpetrated in addition to fraud in the strict sense of the term have led some 
Member States to set up special departments or programmes to monitor firms 
continuously. 
Some Member States have developed specific techniques for detecting fraud in individual 
sectors, such as "test-eating" in the catering trade. 
14 
In the light of experience of employing the sectoral approach, the Commission calls on 
Member States to: 
• develop and reinforce the sectoral approach; 
• draw up and widely distribute audit guides and handbooks; 
• exchange details of experience in this area; 
• develop more specialist techniques for detecting fraud, especially in the more 
complex sectors. 
3.4.3 Powers of control 
The powers of the inspection departments, which are in principle strictly delimited in 
order to safeguard the rights of taxpayers, vary extremely widely from one Member State 
to another. 
Conducting searches for accounting documents not made available is, for example, often 
prohibited; access to a private domicile generally requires the prior sanction of a legal 
authority; unannounced visits are normally authorised only if there are grounds for 
suspecting fraud and, in some Member States, are not allowed under any circumstances. 
It is important that the national administrations should have the legal power to carry out 
certain control methods and, in particular, extensive controls providing them with access 
to subsidiary records (documentation which is not of a strictly fiscal or accounting 
nature) and to certain factual information and allowing them to observe operating 
conditions: such information, when it may be sought and used, often provides a basis for 
checking the accuracy of the official accounts (contracts, a diary in which table 
reservations or appointments with suppliers/customers are logged, records of 
maintenance work carried out on machinery and motor vehicles, etc.). 
Estimated assessments may be made only when a firm has not produced certain 
documents or filed tax returns and it is then up to the firm to show that the assessment is 
wrong or too high. 
Certain administrations may also send out questionnaires, which taxable persons are 
obliged to answer; copies of documents may also have to be produced. This option is 
often used to carry out extensive cross-checks without deploying or shifting important 
control resources. 
The question of control powers is a very delicate matter, because it must strike the correct 
balance between administrations and taxpayers. 
The Commission considers as priorities in this context: 
striking the optimum balance between control requirements and the 
safeguarding of traders' rights; 
adapting control powers in such a way that they are reinforced to the extent 
demanded by suspicions of fraud or by the seriousness of a presumed or 
recorded fraud. 
15 
3.4.4 Investigations into organised fraud 
Where controls do not involve an actual taxable person, as is often the case with carousel 
frauds and fraudulent arrangements, detection of the fraud often requires complex, 
extensive investigations in order to reconstruct a situation which is not at all apparent. 
Most Member States express concern about such practices as carousel fraud and bogus 
companies since they are generally planned and carried out by entire organisations whose 
sole purpose is tax fraud and which are often linked to fraud in other fields (direct 
taxation) or other kinds of criminal activity (money laundering, counterfeiting, 
smuggling, etc.). 
The extraordinary difficulties involved in carrying out controls in this context derive 
mainly from the fact that: 
• the bogus companies used are often established in another Member State or in a third 
country, which makes it more difficult to carry out controls and check on their real 
nature; it also enables them to benefit from exemption from VAT in the case of 
intra-Community supplies and exports. A classic example is the creation in another 
Member State or third country of fictitious taxable persons who are the declared 
consignees of tax-free goods which never actually leave the Member State of origin: 
this enables the seller to deduct the input tax paid and to acquire tax-free goods which 
he can resell on the black market; 
• bogus companies, which are generally set up in the form of small and medium-sized 
enterprises or liaison offices of foreign undertakings, use the simplified tax 
arrangements introduced by most Member States for small businesses. As a result, 
they are subject to less stringent fiscal or legal obligations, which makes it more 
difficult for the national tax administrations to keep tabs on them.23 This is 
particularly true when such companies fail to register; 
• transactions are often split into a large number of smaller transactions which are not in 
themselves of interest in risk-analysis terms; 
• finally, in addition to locating transactions in a number of different countries in turn, 
the commercial chains involve a large number of companies or intermediaries with an 
extremely short lifespan or period of actual activity. 
In such a set-up, everything is designed to appear normal but, at the same time, to avoid 
leaving any trace: taxable persons spring up and disappear quickly, change their business 
name frequently, relocate within a short time, have no proper structure and keep either no 
accounts at all or only very sketchy and simplified accounts. A prompt and immediate 
clampdown on such fraudulent networks, the seizure of as much evidence as possible and 
identification of the real perpetrators is essential both to justify claims of back tax and for 
its actual recovery. 
At intra-Community level, operational departments have on several occasions24 argued 
for exchange and communication systems that are swift, direct, informal and unhampered 
by red tape. 
23 For example, SMEs are often subject to a simplified tax regime whereby declarations are less 
detailed and need not be submitted at such frequent intervals. 
24 At the following meetings among others: Helsinki, SCAF, European Conferences of VAT Inspectors, 
Mattheus Tax Seminars, OECD/HM C&E. 
16 
It is of paramount importance that tax administrations should have access to data held by 
public or private bodies25 and to information collected from suppliers or customers of the 
firm concerned (invoices for goods purchased, contracts signed with the firm, etc.) if they 
are to detect concealed activities. Most Member States have, therefore, made it easier for 
their tax administrations to gain access to such information, which is subsequently 
cross-checked with the firm's tax file. 
In some Member States, this data can be obtained through on-line connections to data 
bases. 
By way of conclusion, the Commission: 
emphasises that success in investigating these types of fraud depends on the 
immediate detection of the fraudulent scheme and, above all, in the prompt 
implementation of stricter preventive measures; 
in view of the international and intra-Community character of this type of fraud 
and in order to prevent any escalation in the situation, it calls upon the 
Member States to step up their cooperation in this area and to adopt the requisite 
measures. 
3.5 Recovery 
Effective recovery procedures to ensure that the tax owed is collected are the natural 
corollary of controls. The Second Report dealt with the problems deriving from VAT 
debt management and made a number of recommendations in this connection (see 
Chapter 4 and 6.2(6)). 
As indicated above, in cases of fraud; the administrations run the risk that the taxpayer 
will attempt to avoid paying his VAT debt and to remove goods which could be seized if 
the debt is enforced. This requires special attention and swifter intervention on the part 
of the administrations. This report therefore refers in particular to the obstacles 
encountered by Member States in enforcing VAT claims. 
An elementary precondition for enforcing a claim efficiently and swiftly is that the 
administrations should have adequate legal powers, particularly for obtaining a distraint 
order. In this connection, Member States may, in general, levy a distraint on all the 
defaulter's goods and chattels. However, this process sometimes comes up against 
obstacles of a legal or practical nature (e.g. difficulty in identifying distrainable goods or 
in obtaining the information necessary to enforce recovery, particularly where the taxable 
person's distrainable liquid assets are concerned). While some Member States 
experience major problems in obtaining information on the existence of the taxable 
person's bank accounts and the money contained therein, others can obtain a distraint 
25 Useful information generally relates to contracts for telephone, fax and electricity supplies, 
car-registration, chambers of commerce, customs, public records departments, professional 
associations and any other data specific to individual sectors. In the case of the building industry, for 
example, information held by bodies responsible for issuing building permits or that contained in land 
or mortgage registers may prove useful. 
17 
order on the basis of agreements with the banking organisations. It should also be 
pointed out that the lack of harmonisation of national legislation in this area is one of the 
main reasons why Member States make limited use of (cross-border) mutual assistance 
for recovery purposes.26 
To be effective, enforced recovery measures must be initiated promptly. However, the 
Commission has noted that in many Member States fairly long periods elapse between 
assessment of the tax and its recovery. This is partly due to the fact that the tax demand is 
not normally directly enforceable on the due date if the tax is not paid and a new 
document must therefore be drawn up to initiate enforced recovery. If the debtor appeals 
against the enforcement order, the delay may be even longer. 
Where recovery procedures are suspended as the result of an appeal, Member States do 
not always make a sufficient effort to prevent defaults on payment (e.g. by demanding 
securities or applying precautionary measures) by fraudsters, despite the major risk of 
default which they represent. Similarly, when the appeal does not succeed or is obviously 
unjustified, penalty interest running from the date on which the tax would normally be 
due and cancelling out the unwarranted financial advantage derived by the debtor is not 
always demanded. 
Some Member States are unable to take precautionary recovery measures based on an 
estimate of the tax ultimately due, even in cases of tax fraud. 
The cumbersome enforced recovery procedure may sometimes be avoided by offsetting 
the tax due against public benefits payable to the taxable person. In practice, however, 
this measure, though effective, is often limited to debts and claims managed by the same 
administration since there is no systematic exchange of information between different 
administrations. 
Finally, where it is implemented, mutual assistance on recovery comes up against a 
number of difficulties, mainly as a result of the fact that only a few Member States give 
other Member States' claims the same priority as their own. 
26 See the Commission's Second Article 14 Report presented in accordance with Council 
Regulation 218/92 (COM(96) 681 final of 8 January 1997, p. 5). The Report identifies a whole series 
of obstacles to assistance in the recovery of claims: lack of harmonisation of legal or practical 
restrictions on distraint procedures, rules making it possible to extend the responsibility for recovering 
claims to the managers of debtor companies, time-limits for recovery, rules on banking secrecy, etc. 
Proposals aimed at remedying this unsatisfactory situation are currently being prepared by the 
Commission, which will shortly be proposing amendments to Council Directive 76/308/EEC on 
mutual assistance for the recovery of claims. 
By way of conclusion, the Commission emphasises the importance of: 
ensuring that the recovery authorities have adequate means (information, 
offsetting against other debts, inter-departmental cooperation, data bases, etc.) to 
recover the tax swiftly; 
organising recovery action through the thorough computerisation of procedures, 
so that the period that elapses between assessment of the debt and enforced 
recovery can be reduced; 
preventing defaults on the payment of VAT debts more effectively by applying 
precautionary measures, including precautionary recovery, by demanding 
securities and charging penalty interest when payment of the VAT debt has been 
delayed by an unjustified appeal; 
treating other Member States' VAT claims in the same way as domestic claims. 
4. CONCLUSIONS 
Article 12 of Regulation (EEC, Euratom) No 1553/89 requires the Commission to 
consider with the Member States what improvements can be made to their VAT 
procedures to enhance their effectiveness. The Commission has to draw up a report 
on these improvements every three years. 
This consideration of possible improvements to VAT controls has to be based on a 
common analysis of the problems and possible solutions. In Chapter 2, the 
Commission analyses the common problems facing the Member States regarding 
VAT controls. In Chapter 3, it sets out its view of the best way to tackle fraud, 
drawing on acquired understanding of the problem and combining the best practices 
identified by Member States and communicated to the Commission. 
Many of these recommendations have already been implemented by a number of 
Member States. However, much work has still to be done. The Commission 
considers that all the Member States should examine the recommendations set out in 
the report, since they would enable them to improve VAT controls. 
These recommendations are based on the determination to optimise compliance by 
taxpayers with their obligations and to prevent fraud through an effective inspection 
strategy based on the application of risk analysis to the selection of the taxpayers to 
be inspected. Such a strategy calls for immediate access to important information 
and for the use of appropriate and flexible controls and recovery methods designed 
to prevent tax fraud. Improved expertise in the fraud field, appropriate use of the 
powers of law enforcement authorities, and greater cooperation between 
Member States will be essential if fraud is to be countered. The Commission will 
make its contribution through programmes such as Fiscalis (e.g. by pooling 
experience of measures taken to combat fraud) and other committees involving the 
Member States (e.g. SCAF). 
Over the next three years, the Commission intends to examine with the competent 
authorities in each Member State how the effectiveness of VAT control procedures 
might be improved. To that end, it will study, together with each Member State in 
turn, all the control procedures employed by them. The analysis and 
recommendations made in this report will serve as a basis for this joint assessment 
of potential improvements. The fourth report will set out the findings of that study. 
19 

ISSN 0254-1475 
COM(98) 490 final 
DOCUMENTS 
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Catalogue number : CB-CO-98-518-EN-C 
ISBN 92-78-38892-0 
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