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Last Updated: Wednesday, 10 August 2005, 23:02 GMT 00:02 UK
VAT fraud adds doubt to UK trade figures
By Will Smale
BBC News business reporter

Mobile phone
Most makes of mobile phones are said to be traded in the scams

A particular type of VAT (Value Added Tax) fraud is continuing to distort the UK's trade deficit by millions of pounds, it was revealed this week.

The seriousness of the scam can be seen in the fact the warning has came from both HM Revenue & Customs and the Office for National Statistics (ONS).

One is dealing with the problem at the sharp end and the other has been forced to point out how serious its effects could be to UK plc.

So prevalent is the scam that the ONS has cautioned that the latest upbeat trade figures - which showed a marked 71m improvement in the difference between what the UK exports and imports - may have been wrongly exaggerated by the fraud, and could eventually need to be revised.

But what exactly is the VAT fraud in question, and how could it be distorting official UK trade figures?

Overseas partners

The fraud is called "missing trader fraud", and in simplest terms it involves a fraudulent UK firm importing goods such as mobile phones VAT-free, then selling them in Britain with the VAT price added, only to fail to pay the VAT to HM Revenue & Customs.

As often happens when tackling organised crime, our success has prompted changes to the fraud
HM Revenue & Customs spokesman
To make life even easier for themselves, the fraudsters in many cases initially buy the goods themselves in the UK before exporting them - VAT-free - to associates abroad.

They then simply import the goods back into the UK from their overseas business partners, sharing both the eventual profits and the VAT monies that should have gone to the UK exchequer.

As the ONS uses VAT receipts to help it determine imports into the UK, it is all to easy to see how its figures can be distorted by missing trader fraud.

Further afield

While the scam is far from new - it first surfaced in 2000 - it has returned as a problem because the fraudsters have entered new overseas markets to try to keep ahead of customs officials.

Where previously the scams would involve UK firms exporting and them importing goods to and from other nations within the European Union, such has been the success of HM Revenue & Customs in clamping down on the illegal trade, the fraudsters have now turned their attention to countries outside the EU.

The fraudsters are now said to favour using Dubai, Hong Kong, and Singapore in particular. This could be a major contributing factor why exports to Dubai rose by 500m between May and June, while exports to France dropped by 300m.

A HM Revenue and Customs spokesman said the organisation was "well aware" of the missing trader fraud, and "had been successfully tackling it since 2000".

"As often happens when tackling organised crime, our success has prompted changes to the fraud including, in this case, changes to the underlying pattern of trading," he said.

"We are analysing recent trade data to determine if this impacts on balance of trade figures."

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