Budget Special: Smugglers to pay the price in bid to get pounds 2.5bn

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The government is to launch a crackdown on revenue fraud, smuggling and tax evasion in a bid to raise pounds 2.5bn more tax over the next three years.

The main focus will be on VAT fraud where the Chancellor said that even though revenues had revived in recent months they were still coming in significantly below what was expected last year.

The clampdown will be on what Kenneth Clarke described as some of the "clever wheezes" that have sprung up to avoid the payment of VAT.

The measures, which are part of the "Spend and Save" scheme, will raise pounds 750m in revenue this year and protect a further pounds 1.5bn a year of existing revenue from further attack.

To man the new drive HM Customs & Excise will retain 1100 trained VAT staff who had been due to leave the division as part of a streamlining programme announced in 1994.

These staff will now be used to target what Customs describes as "high risk traders" with a poor record on VAT payments. Sectors that will be targeted include building and construction and the textile trade. Entrepreneurs with poor VAT payment records and those with a history of running "Phoenix" companies, which go bust and then start up again, will also be subjected to special attention. Extra staff such as specialist accountants will also be hired.

Another key move is against retailers which reduce their VAT bills when selling insurance products with their products. Under existing legislation some retailers have been reducing the cost of the product, which is subject to VAT, but increasing the price of the associated warranty which is not. This has the effect of lowering the tax paid.

The government plans to introduce a higher rate of insurance premium tax for a limited range of goods and services. The standard rate of VAT of 17.5 per cent will apply to mechanical breakdown insurance on domestic appliances and second hand cars as well as travel insurance, and policies sold with televisions and car hire.

The move is expected to hit electrical retailers such as Dixons and Comet. Dixons shares fell sharply on the news.

Andrew Higginson, chairman of the economic affairs committee of the British Retail Consortium said: "We're waiting for the detail but language like `clampdown' is not very welcome, particularly when it seems to be singling out particular sectors."

Other measures include a rise in the VAT threshold from pounds 47,000 to pounds 48,000 from midnight last night.

A telecoms loophole which allows suppliers outside the European Community to sell telecommunications services in the UK without VAT is to be plugged. This will protect pounds 800m of existing revenue.

There is to be a customs block on international VAT avoidance. New rules will ensure parity of treatment between multi-national VAT groups and businesses based entirely in the UK.

The "zero-rated" status has been maintained on sectors such as books, newspapers and magazines as well as fresh food and childrens clothing.