VAT fraudsters stole hundreds of millions of pounds from British taxpayers in 2005, funnelling much of their loot through Dubai, government unpublished figures show.
The statistics reveal that Britain exported £4.8bn worth of goods to Dubai last year, making the emirate the eighth-biggest importer of UK goods in the world. But the trading of mobile phones amounted to 60 per cent of that - some £2.8bn - and most of those transactions are likely to have been fraudulent.
Revenue & Customs sources say that Dubai became the key trading centre in a new wave of VAT fraud during 2005. Previously, VAT criminals routed their preferred merchandise, mobile phones, through the EU, but many European countries have tightened their border controls.
The figures, which have not been seen before, are all the more striking as Britain does not manufacture mobile phones and Dubai has a population of just 900,000. But the emirate has some 40 free- trade zones where goods can pass through the country with the minimum of regulation and paperwork.
David Raynes, a former senior Customs investigator, said he had drawn the attention of Customs to the fraud scam using Dubai last summer. "But colleagues told me they did not have enough resources or manpower at that point to take on any more VAT fraud cases."
Customs has since tightened the controls on exports between the UK and Dubai, and this has cut the level of fraud. Separate, newly obtained trade figures for the first six months of 2006 show mobile phone trade to Dubai was around half that for 2005 but that it still averaged a staggering £120m a month.
How effective Customs' latest crackdown on VAT fraud has been will become clear this week when new quarterly figures for all UK trade are released tomorrow. These will give a clue to the total VAT fraud bill for the UK for this year. Figures for the last financial quarter show around £10bn of fraudulent trade, up from a record £6.5bn in the first quarter of 2006.
Dubai is key to the development of "linear carousels", so called because the trading chain is broken as the goods leave the EU after the fraud is committed, rather than going around and around inside the EU.
The vast majority of these frauds originate in Dubai with the purchase of goods such as mobile phones. The goods are then sold to a company registered in an EU country, the Netherlands for example.
After this, the phones are flown to a second EU country, say Belgium, and held in a warehouse while the Dutch company sells the goods - at least on paper - to a third EU company.
But the goods never get to those owners; the paper transactions are designed solely to disguise the fraud. Instead the phones are transported to the UK where they are stored.
Ownership swiftly changes as they are bought by a UK "missing trader" who sells them on to a UK "buffer" company - charging 17.5 per cent VAT.
The "buffer" subsequently sells them on to an exporter, who in turn sells them back to the original company in Dubai, to whom the phones are exported from the UK.