Tax rises or government spending cuts looked a growing possibility yesterday after official figures estimated that so-called "carousel" fraud activity had jumped another 50% in the second quarter of the year, reports the Guardian.
The paper says the Office for National Statistics, the government statistician, estimated that there had been nearly £10bn of criminal activity aimed at fraudulently reclaiming VAT from HM Revenue & Customs. That was up from £6.5bn in the first quarter and four times the estimate for the same period last year.
The amount of VAT actually lost to fraud was unclear. Figures for 2005 will not be released until Gordon Brown's pre-budget report at the end of the year. But for 2004, the latest year for which figures are available, the government has calculated VAT theft was £1.1bn-£1.9bn, on estimated fraudulent trading worth £2.4bn. With activity estimated to exceed £30bn this year, 15 times the level of 2004, the actual VAT losses could run to £20bn - the equivalent of 6p on the basic rate of income tax.
Treasury officials denied that carousel fraud was out of control. "We are aware that operational indicators suggest levels of [fraud] activity are increasing and we have responded robustly. However, the adjustments ... represent attempted fraud, not stolen VAT, and it is not possible to make assumptions about losses incurred by the Exchequer," said a spokesman.
A spokeswoman added that the department was getting to grips with the problem: "HMRC's significantly strengthened operational strategy to tackle this fraud though a combination of legislation, litigation and operational initiatives is delivering results."
Vince Cable, the Liberal Democrat Treasury spokesman, was unconvinced. "There is an alarming degree of complacency in the government about the large-scale damage this fraud can do to tax revenues," he said.
He said European countries needed to develop a common approach to prevent fraudsters abusing the single market. "The British government has been very slow to take up this challenge."
Revenue & Customs has acknowledged the explosion in fraudulent activity and recently doubled the number of investigators to 1,000. In the past it has repeatedly struggled to catch, let alone prosecute, fraudsters, which it said had further encouraged the criminals. However, it recently made a number of convictions and morale among investigators has improved.
The high level of fraudulent activity is distorting Britain's trade figures. Data from the ONS yesterday showed British goods exports up 39% in the second quarter on the same period last year. Once the estimated carousel fraud activity was removed, exports were up 12%.
The Bank of England, in its quarterly Inflation Report yesterday, expressed its frustration at fraud muddying its reading of the economy. "Carousel fraud makes it extremely difficult to ensure accurate measurement of trade flows," it said.
The European Tax Commissioner, Laszlo Kovacs, has given Revenue & Customs permission to introduce "reverse charging" for VAT on mobile phones and computer chips, which are commonly used in carousel fraud. VAT would then become payable only once the goods reached a retailer, thus preventing the VAT being stolen along the way.
But Revenue officials have admitted this is only a stop-gap measure. Kovacs said the only solution is a fundamental overhaul of the EU VAT system to prevent refunds when goods cross borders. He told the Guardian recently that carousel fraud losses across the EU were in the region of €50bn (£34bn), equivalent to the Common Agricultural Policy budget.
Separately, law firm DLA Piper said the high court had given it the final go-ahead to gather a group of companies together to sue Revenue & Customs for losses as a result of its attempt to clamp down on carousel fraud.
DLA Piper senior partner Simon Airey estimates that up to 150 companies could join the group litigation order and claim tens or even hundreds of millions of pounds in damages.
"This is clearly an area where there is a large body of fraudsters making an awful lot of money. But there are also legitimate traders who have been hurt by HMRC's actions. It is these firms we are trying to help because they are being treated as civilian casualties in the war against fraud," said Airey.
In its simplest form, carousel, or "missing trader", fraud involves a fraudster in one EU country importing small, high-value goods such as mobile phones from another free of VAT. The trader adds the VAT and sells the goods to another dealer without handing on the tax to the government.
Often the goods are passed along a string of traders and re-exported, with the VAT being reclaimed at the point of export. The goods are then re-imported and spun round the loop again. Goods have been known to go round a carousel 32 times, with the VAT reclaimed each time. The activity is done rapidly and often the VAT has been reclaimed and the fraudsters vanish before HMRC realises what is going on.
Criminals involved in the scams have told the Guardian that they are increasing their activity thanks to sophisticated computer programs allowing them to spin "virtual carousels" where they don't even have to physically move the goods. HMRC investigators say organised criminals have moved in to the scam in the past year and are fraudulently reclaiming VAT on a much wider range of goods including insulin kits and razor blades.
SIR James Crosby has wasted no time taking up his first appointment since retiring from HBOS in recent days and is to join his former Royal Bank of Scotland adversary Sir George Mathewson as an advisor to Bridgepoint, reports the Financial Times.
The paper says the banking industry veterans, who often crossed swords in their previous roles as heads of the two large Scottish banks, will now sit side by side on the buy-out group's European advisory committee and provide advice on strategic matters.IFAonline
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till