Treasury windfall as Customs clamps down on VAT fraud

The success of a crackdown by Customs and Excise on a VAT fraud perpetrated by organised crime has saved the Treasury several hundred million pounds it emerged yesterday.

The success of a crackdown by Customs and Excise on a VAT fraud perpetrated by organised crime has saved the Treasury several hundred million pounds it emerged yesterday.

Criminals importing goods such as mobile phones and computer chips had been claiming VAT rebates on goods that were simply being imported and exported repeatedly without ever being sold on.

The fraud exploits a trading rule between European Union countries, under which VAT is paid only when goods are sold on the domestic market.

At its peak in 2002 the scam - dubbed the carousel fraud - was worth £11bn a year effectively costing the Exchequer almost £2bn in fraudulent VAT rebates.

Yesterday Customs revealed that the scale of the fraud had been cut tenfold, falling to £4.5bn in 2003 and £1.6bn in 2004 - meaning that the Treasury's loss is now less than £100m a year.

The estimate for the financial year ending this month is not available but will feed into the public finances figures to be announced by Gordon Brown in next week's Budget.

The Chancellor also benefits from £17.2m worth of assets recovered between 2001 and 2004 as the result of 22 successful prosecutions over that period.

Last month six men were arrested in an alleged £580m VAT fraud, the largest yet, while more than 80 prosecutions involving sums ranging from £30m to £300m are going through the courts.

"We have been successful in cracking down on this fraud," said a Customs spokesman. "It has contributed to lessening the VAT gap."

The scale of the fraud was so large that it added more than £22bn to the UK's cumulative deficit over the four years to 2001. Yesterday the Office for National Statistics said it had no plans to revise those figures.

Separate ONS figures showed that the UK's goods trade gap widened unexpectedly to £5.2bn against forecasts of a £4.6bn deficit. The gap with non-EU countries widened sharply to a record £2.99bn pounds in January, as did the ex-oil and erratics gap, which hit a record £5.50bn.

But the ONS issued a health warning for the numbers, saying they had been affected by a revision of its seasonal adjustment processes, particularly for non-EU exports.