Sophisticated VAT scams centred in the Midlands boosted the country’s reported fraud by 40 per cent last year to a record £1.37 billion.

The tax swindles, known as “carousel” or “missing trader” fraud, sent the value of business fraud in the Midlands up 600 per cent to more than £600 million, according to the annual FraudTrack survey from the accountants BDO Stoy Hayward.

That put the region ahead of London and the South East as the fraud hotspot of Britain for the first time since the survey began four years ago. Reported fraud in London and the South East was up from about £450 million in 2005 to £517 million last year.

According to the figures, the number of reported frauds in Britain rose by a third last year to 295 crimes, involving £1.37 billion. The accountants said the true cost of fraud last year was closer to £5 billion because research showed that only 15 per cent of businesses report frauds against them to the police.

The report, which analyses cases of more than £50,000 that are reported to the police, found that the public sector suffered the biggest fraud losses, with costs of about £600 million. The highest number of fraud cases was reported in the financial services sector, with 27 instances.

Theft, cash and tax fraud were the most common types but carousel fraud was a growing problem. The offence is committed by organised gangs that import goods such as mobile phones free of VAT then sell them on, charging VAT on top. The gangs then pocket the VAT instead of paying it to the taxman.

In more complex versions gangs trade the goods around a series of front companies in a “carousel”, importing and re-exporting them.

Government figures put the total cost of carousel fraud to the UK taxpayer at £3 billion a year, with 18 convictions last year. Less than £10 million of lost revenue has been recovered to date. The BDO report showed that three high-value cases of carousel fraud in the Midlands were responsible for the surge in the region.

Over-valuation of properties was another key source of fraud, according to the report, after record housing market growth. The authors warned anyone involved in property transactions, especially private equity groups and venture capitalists, to be especially cautious, as they are most at risk.

Simon Bevan, head of fraud at BDO Stoy Hayward, said: “A lot of money has been lent over a short period to management teams for investment and acquisitions. When the tide goes out you can see who is swimming without their trunks on. If interest rates continue to nudge up in 2007, underperforming but overvalued businesses will be quickly exposed.”

The study said that a desire to live the life of the rich and famous motivated more than half of all UK fraudsters.

Explore Law

• Columnists

• Law Panel

• Law Reports

• Student Law

Times Recommends

• BGC 'set aside £40m to lure Tullett brokers'
• Legal aid review to ensure value
• Fears as 21 magistrates' courts face closure