KAMPALA — Ugandan Tax authorities have uncovered an elaborate scheme involving fictitious invoicing and abuse of the Value Added Tax (VAT) system, following an internal investigation into a taxpayer flagged as high-risk through routine data analytics.
The case, drawn from an anonymised internal review, illustrates how invoice trading can be used to generate artificial transactions aimed at enabling improper VAT input claims, and highlights the enforcement challenges faced by revenue authorities.
According to officials familiar with the matter, the investigation was triggered after analytical reviews identified unusual transaction patterns linked to the taxpayer. These patterns suggested invoice trading, a practice where fictitious sales and purchases are circulated through multiple entities to create false VAT credits.
Scrutiny intensified after the taxpayer was found to have claimed substantial purchases and corresponding input VAT from an entity already classified as high-risk. The claims were initially reviewed and disallowed by the Domestic Tax Department, prompting a broader examination of the taxpayer’s commercial activities.
Client concentration raises red flags
Investigators established that the taxpayer operated with a very narrow client base, largely dependent on two major customers. Despite this limited market reach, the company declared disproportionately high sales volumes.
This client concentration, when assessed alongside the scale and diversity of purchases declared in VAT returns, raised concerns among investigators. Officials noted that such a mismatch is a common red flag in cases involving fictitious transactions.
Supplier disputes transactions
A critical turning point in the investigation involved a supplier listed as having provided goods worth hundreds of millions of shillings, together with significant VAT.
When contacted, the supplier formally denied ever engaging in any business transactions with the taxpayer.
The supplier indicated that the invoices may have been declared without its knowledge, raising suspicions that fictitious documentation could have been generated, possibly with the involvement of an external accounting service provider.
Although an arrest was made during the course of the investigations, a subsequent case management review determined that the available evidence was insufficient at that stage to sustain criminal proceedings.
Governance gaps complicate enforcement
Further complications emerged from weaknesses in the taxpayer’s corporate governance. Current directors, through their legal representatives, stated that business operations had commenced relatively recently following the acquisition of land for commercial use.
However, they were unable to produce supporting documentation to substantiate operational activities, asset ownership, or historical transactions requested by investigators.
Efforts to trace former shareholders and directors also proved difficult as all registered contact details were found to be inactive, prompting tax authorities to seek assistance from immigration agencies to flag the individuals should they attempt to enter or leave the country.
Lessons for tax compliance
Officials say the case highlights the continued threat posed by invoice trading to the integrity of the VAT system, particularly where supplier verification mechanisms are weak.
It also highlights the risks businesses face when relying on third-party accountants without adequate internal oversight, as well as the challenges posed by weak corporate governance structures and untraceable company officials.
Tax authorities note that advanced data analytics, supplier verification, and inter-agency collaboration remain critical tools in detecting and responding to increasingly complex tax evasion schemes.
While enforcement actions may be constrained by evidentiary and logistical hurdles, officials say such investigations serve as a deterrent and reinforce the importance of compliance, transparency, and proper record-keeping in safeguarding public revenue.
