Despite six years of efforts to clamp down on so-called “carousel fraud”, the VAT-avoidance scam is still costing the Treasury billions of pounds, an MPs’ report said today.

The House of Commons Public Accounts Committee urged the Treasury to be “vigilant”, but said that the real solution to the problem lay in changes to the way the European Union implements VAT laws.

Carousel fraud sees criminal gangs repeatedly importing and exporting small and high-value goods between EU states and claiming VAT back on them in each state.

In some cases, the goods do not even exist, except on paper.

The scam - also known as missing trader intra-community fraud - is believed to have cost the UK between £2 billion and £3 billion in 2005-06 and to have netted criminal gangs as much as £40 billion across the EU.

In February 2006, the Government obtained permission from the EU to operate a “reverse charge” mechanism under which VAT is removed from the business chain, denying fraudsters the opportunity to claim it.

However this permission applies only to mobile phones and computer chips, which were formerly the preferred targets of carousel fraudsters, and it appears that they have simply switched to other products. The total saved as a result in the UK is estimated at around £50 million - a fraction of the amount being lost.

Committee chairman Edward Leigh said: “Missing trader fraud is continuing to cost this country a colossal sum each year. The estimate for 2005-06 is some £2 billion to £3 billion. This is despite the Department’s efforts over the last six years or more to stem the flow.

“The UK applied for and is now allowed by the EU to apply the so-called 'reverse charge' mechanism. However, it is ridiculous that this mechanism applies only to transactions involving mobile telephones and computer chips because the criminals can simply switch their attentions to others kinds of high-value goods.

“I expect the Department to be vigilant and, as soon as this very real possibility materialises, to get back on to the EU to expand the scope of the mechanism.

“There has to be more co-ordinated working between EU member states. But nothing short of a new legislative framework in the EU for administering VAT will enable us to prevent these gangs from stealing public money on such a scale," he said;.

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