Value-added tax (VAT) fraud costs the French government between 20 billion and 25 billion euros every year, according to the French Senate. It’s a particularly costly form of fraud that can negatively affect your business if you’re not careful, so it’s important to understand how it happens and how you can protect yourself from it.

In this article, we’ll look at some of the most common ways VAT fraud can occur, the penalties applied, and what precautions businesses can take to avoid it.

What’s in this article?

• What is VAT fraud?
  
• What kinds of VAT fraud are there?
  
• What is VAT carousel fraud?
  
• What are the tax penalties for VAT fraud?
  
• What are the criminal penalties for VAT fraud?
  
• What measures are in place to combat VAT fraud?
  
• What precautions can be taken to avoid VAT fraud?
  

What is VAT fraud?

VAT fraud is the intentional act of evading, or attempting to evade, partial or total payment of VAT to the state. Any attempt to obtain an improper VAT refund is also considered VAT fraud.

Learn more about VAT rates, VAT returns, deductible VAT, and VAT credits.

What kinds of VAT fraud are there?

VAT fraud can take many forms, some of which are more complex than others. The methods used include:

• Creating fake documents such as invoices and VAT returns to reduce the amount of VAT due, justify false expenses, or obtain VAT credits
  
• Setting up a fake business in France
  
• Failure to file VAT returns on time
  
• False, inaccurate, or nonexistent accounting
  
• Conducting an unregistered or disguised activity to evade taxes
  
• Creating a false address abroad to pay lower taxes or to evade them
  
• Receiving funds in cash to avoid paying VAT on a product sold or a service rendered
  
• Recording personal expenses as business expenses to obtain a VAT deduction
  
• Manipulating sales or VAT rates to reduce VAT liability
  
• Reducing the amount of taxes due
  
• Abusing tax regimes such as VAT reverse charging to reduce the amount of taxes due
  
• Organized VAT fraud, also known as “carousel fraud”
  

What is VAT carousel fraud?

Carousel fraud is a VAT scam involving a series of transactions among several businesses. The goal of carousel fraud is to buy and sell goods without paying the VAT due, to reduce the amount of VAT due, or obtain a refund for tax that was never paid.

An example of VAT carousel fraud

Say Business A, based in Belgium, makes an intracommunity—and therefore VAT-exempt—sale to Business B, based in France. Business B is fictitious and creates false invoices to resell the same goods, inclusive of all taxes, to Business C, also based in France. Before paying back the VAT collected on the sale, Business B folds. Business C deducts the VAT and receives a refund of the VAT paid. Finally, Business C resells the goods to Business A in Belgium with no VAT (because it is an intracommunity sale).

This type of fraud is typically used for high-value-added goods such as electronics, cell phones, textiles, second-hand cars, and carbon quotas. You can find more information on carousel fraud by reading the fact sheet provided by the General Directorate of Public Finances (DGFiP).

What are the tax penalties for VAT fraud?

VAT fraud is subject to financial and criminal penalties. Any transaction not declared within the required time frame risks a tax surcharge of 80%.

In the event of deliberate tax evasion (i.e., a false or deliberately incomplete VAT declaration), you risk a surcharge of:

• 40% for intentional omission
  
• 80% for abusing tax regulations (reduced to 40% if you did not initiate the procedure or are not the main beneficiary)
  
• 80% for conducting fraud intended to mislead the tax authorities
  

You might also incur interest on late payments at a rate of 0.2% per month.

To avoid unintentional errors on your returns, you can use Stripe Tax, an automated tool that speeds up the completion and submission of your VAT returns while providing detailed reports on your transactions and income for the year.

What are the criminal penalties for VAT fraud?

In addition to financial penalties, you risk criminal punishment for conducting VAT fraud. Penalties vary according to the severity of the offense.

You could face a fine of €500,000 and 5 years in prison for a tax offense. If the Commission for Tax Offenses deems your offense particularly serious, the fine increases to €3,000,000 and 7 years’ imprisonment.

You risk more severe penalties if your offense:

• Is committed as part of an organized group
  
• Involves opening accounts or taking out contracts abroad
  
• Involves the use of individuals or front businesses established abroad
  
• Involves the use of a false identity, false documents, or any other falsification
  
• Concerns tax residency or false transactions abroad
  

What measures are in place to combat VAT fraud?

France has numerous measures to combat VAT scams, including an anti-fraud law in force since January 1, 2018. Introduced in Article 88 of the 2016 Finance Act and Article 105 of the 2018 Finance Act, the law requires professionals conducting transactions with customers not subject to VAT to use accredited cash register software that prevents the alteration of data. Professionals covered by the basic VAT exemption are exempt from this requirement.

The shift to electronic invoicing between businesses (Article 26 of Law 2022-1157 on Amended Finances 2022) is also designed to combat VAT fraud. Starting in 2026, the transmission of electronic invoices and transaction data will enhance tax authorities’ ability to detect VAT fraud more effectively. Learn more about business-to-business (B2B) e-invoicing reform.

Since January 1, 2024, tax authorities have had the authority to prosecute individuals who supply tools that facilitate tax fraud, as stipulated in Article 113 of the 2024 Finance Act.

What precautions can be taken to avoid VAT fraud?

As a business, you can protect yourself against VAT fraud and avoid unintentional involvement in fraudulent schemes. You should check the validity of your customers’ and suppliers’ intracommunity VAT numbers and the accuracy of invoices. It’s important to ensure the VAT and the amount invoiced are correct.

Additionally, you should carry out regular internal audits and make sure your employees are aware of the signs and penalties of VAT fraud so attempts at fraud are discouraged.