Customs fails to collect £12bn in VAT

The Government failed to collect nearly £12bn in VAT last year, according to official estimates from Customs & Excise. These also show that the "VAT gap" - the difference between theoretical and actual tax yield - increased by a whole percentage point from the previous financial year.

The VAT gap estimate for 2002-03 was put at 15.7 per cent, up from 14.7 per cent in 2001-02. Graham Gunning, VAT partner at the accountants Ernest & Young, said the figure was disturbing: "That's a lot of tax lost. If local councils failed to collect nearly 16 per cent of council tax there would be an outcry."

The VAT gap is created by a combination of VAT "missing trader" fraud, tax avoidance and other losses attributed to non-compliance. The figures show that in 2002-03 missing trader fraud cost the taxpayer up to £2.6bn, despite the crackdown launched in September 2000 and another major injection of resources in April 2002. "There is some evidence that the crackdown is working but these figures are still frighteningly large," said Mr Gunning.

The estimate for VAT fraud in 2002-03 was £1.65bn-£2.64bn, 5 per cent down on 2001-02 but still higher than the two years before that. Customs figures suggest VAT fraudsters have stolen up to £10bn in the four years since 1999-2000.

VAT missing trader fraud relies on weaknesses in the European single market, as trades between two EU countries are exempt from the tax. Fraudsters use front companies to import goods VAT-free and sell them on in the UK, charging VAT at 17.5 per cent. Somewhere in the chain, a trader disappears with the VAT, often worth tens of millions of pounds.

Mobile phones and computer chips are ideal for the fraud because they are in high demand, small and easy to transport. In the scam's more elaborate form, known as carousel fraud, the goods appear to be sold on through a series of companies including some in other EU countries. Each time the product passes "Go" at an EU border, fraudsters pick up the VAT.

Customs have set a target to cut the VAT gap to 12 per cent by 2005-06. Customs will by then have increased by 1,000 the number of staff tackling VAT evasion and avoidance.

Customs say both the VAT gap and VAT fraud will be substantially reduced in 2003-04. "We expect a big drop in the VAT gap this year. Current estimates show that we will collect £2bn VAT more than forecast," a senior Customs official claimed. "We have also put VAT missing trader fraud into decline. The figures for the last financial year do not tell the whole story."

Customs say the tough enforcement regime and regulations that began last summer have had a major impact on VAT fraud in the mobile phone and computer chip-brokering industries.

Customs' own figures show that 11 people were prosecuted in 2002-03 for missing trader fraud. "There are now over 80 missing trader cases in the pipeline," said a senior Customs official. "These cases take a while to prepare and we are at the mercy of the court system for trial dates."