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Carousel fraud 'has cost UK up to £16bn'

By Sean O'Grady, Economics Editor
Thursday, 26 July 2007

MPs have condemned the lack of official action to end so-called carousel trading or "missing trader fraud". It was claimed that carousel trading is an activity that amounts to "a large-scale criminal attack" on the VAT system, and which has cost British taxpayers billions of pounds.

The fraud occurs when small, high value items, such as mobile phones, are exported and re-imported again and again in a series of contrived transactions.

The tax authorities repay VAT to the criminals when the goods are exported but suffer losses as the VAT was never collected when the items were imported in the first place. In 2005-6, the Commons Public Accounts Committee say, the cash loss amounted to £2bn to £3bn, with the cumulative loss to the Exchequer since 1999 running at between £10bn and £16bn.

However, Belgian investigators using EU figures have estimated British losses at £8bn a year. The European Union puts the fraud across the union at £40bn annually. Some 157 convictions have been secured for carousel trading since 2001, with an average sentence of under four years.

The chairman of the PAC, Edward Leigh, said: "There has to be more coordinated working between EU member states. But nothing short of a new legislative framework in the EU for administering VAT will enable us to prevent these gangs from stealing public money on such a scale."

More recently, the fraud has extended beyond the EU to states such as Dubai and Switzerland, making detection more difficult.

A move by the authorities to alter the VAT treatment of mobile phones and computer chips - the "reverse charge" mechanism - protects a mere £50m of tax revenue, and has resulted in the fraudulent activity migrating to cover MP3 players and other items. The money is laundered offshore, through Curacao and Dubai.

The EU wants to end the system of zero rating for intra-EU transactions, but the British authorities believe this would simply open up new opportunities for new frauds.

A spokeswoman for the Revenue and Customs said: "The Government's strategy has had a significant impact - ONS statistics suggest that activity has fallen by over 90 per cent since this time last year, and we are confident that this trend will be maintained."

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