Legitimate firms 'will go bust' in crackdown on VAT fraud

Mobile phone traders have accused Revenue & Customs of launching a hard-hitting VAT crackdown that is driving legitimate companies out of business.

Up to 1,000 traders in the mobile phone and computer-chip industries have been told individually that their VAT repayments are under "extended review". Normally, repayments are made within 30 days of a claim, but Customs is currently withholding refunds for three months or more.

"This is causing huge cash- flow problems for our members," said Anthony Elliot-Square, chairman of industry body the Federation of Technological Industries. Earlier this month, the FTI held an emergency meeting attended by around 400 memebers. "Traders are now owed millions of pounds in VAT repayments," said Mr Elliot-Square. "It is making it impossible to trade. Some will go bust."

Customs' latest crackdown follows mounting evidence that losses from VAT fraud are out of control. According to figures from the Office for National Statistics and Customs, fraud-related trade grew from £1bn in the first quarter of 2005 to £7.4bn between January and March this year. Revenue losses for 2006 could be as high as £10bn.

VAT fraud relies on weaknesses in the European Union, as trades between two EU countries are exempt from the tax. Fraudsters use front companies to import VAT-free, and then sell on products in the UK, charging VAT at 17.5 per cent.

Somewhere in the chain is a trader who disappears with the VAT. Mobile phones and computer chips are ideal targets for the fraud as they are in high demand and easy to transport.

A Customs spokeswoman said: "We will pay close attention to the activities of traders who choose to operate in these contrived supply chains. Our strategy ... is intelligence-based and our interventions are targeted on those known to be, or suspected of being, participants in these contrived supply chains who know or could know that their transactions are tainted by fraud."

The Government has also secured permission from the Euro- pean Taxation Commissioner, Laszlo Kovacs, to introduce a reverse-charge system for VAT in the computer-chip and mobile phone markets. This would in effect remove VAT cash as a factor in transactions.

The system is expected to come into effect in October. "It will be interesting to see how many traders are left in the market after October. That will give an indication of how legitimate the industry is," said an insider.