UK seen as weak link as VAT fraud costs EU €40bn

European Union countries will lose an estimated €40bn (£27bn) because of VAT fraud this year, according to figures obtained by The Independent on Sunday.

The news follows the disclosure by the BBC on Friday that Britain lost an estimated €12.6bn in the year to June 2006. That estimate was based on figures from Eurocanet, a project sponsored by the European Commission using figures from the police and other groups.

The Independent on Sunday's figure of €40bn, however, obtained from a senior source within the EU, is thought to be higher than Eurocanet's total estimates for the EU.

Experts claim that Britain's failure to control VAT fraudsters is causing problems across the Continent.

"Everybody fighting VAT fraud in Europe knows that [it] all links back to the UK," said a senior Belgian investigator who wanted to remain anonymous. "It's a cancer that has spread out from the UK across the EU."

The fraud depends on the EU practice of zero rating of VAT on goods moved between member countries. Fraudsters bring in high-value commodity goods such as mobile phones and computer chips with no VAT. They then sell them on charging an extra 17.5 per cent, pocketing the difference. In response, EU countries have tightened up on the movement of goods.

UK VAT fraudsters, however, have been routing goods via Dubai to confuse investigators.

VAT fraud is causing the Government considerable embarrassment as well as lost tax revenue. On Friday, however, Paymaster General Dawn Primarolo dismissed the Eurocanet figures as "not credible".

In an attempt to stem the fraud, the UK Government is backing a system called "reverse charge". This works by making the purchaser of the goods at the end of a chain liable for VAT, rather than each seller.

However, reverse charge is still awaiting official EU approval before it can be written into UK law. Revenue & Customs wanted to implement it as early as next month, but it is now not expected to start before 1 December.