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Last Updated: Sunday, 18 June 2006, 16:00 GMT 17:00 UK
The Nemesis for VAT fraudsters?
By Ian Pollock
Personal finance reporter, BBC News

Nemesis has arrived for the Value Added Tax, or VAT, fraudsters depriving the tax authorities of around 2bn a year through so-called carousel frauds.

Paul Gerrard
Paul Gerrard, trying to stem the flow of VAT fraud

Nemesis, in this case, is not the Greek god of vengeance.

It is a computer database containing the IMEI or unique identification number of every single mobile phone being exported from the UK.

Millions are imported into the UK every year.

Their small bulk and high value means they have become the key product in the carousel frauds, known more formally as Missing Trader Intra Community (MTIC) Frauds.

Now, as the phones get shipped out of the country the packaging is stamped by customs officers at docks and airports.

The phones are also scanned and their IMEI numbers are entered on the Nemesis system.

MTIC is one of the most serious attacks on the tax system we have ever seen
David Varney, chairman of HMRC

So if the mobiles go round and round in a circle of international transactions designed purely to generate VAT refunds, then they will soon show up if they are re-imported later on.

Silent contemplation?

There is little time for silent contemplation for Paul Gerrard, the deputy head of enforcement and compliance for HM Revenue & Customs (HMRC).

Laurence Ford
Laurence Ford was sentenced to 6 years in jail for his part in a carousel fraud

Studying nuns for three years may seem an unusual preparation for leading the government's renewed fight against VAT fraud.

But nine years after completing his PhD about nuns, his main job now is to stop the carousel frauds.

The sums being lost are so huge they have been distorting the country's trade statistics.

And according to Gerrard, there seems to have been a renewed upsurge in the last year or so.

"Operationally we have seen signs that that fraud has grown," he says.

"Because they are resilient, the criminal gangs have changed some of the ways they attack us, so there are indications the losses are going up."

A fraud expert at one of the big four accountancy firms - who wished to stay anonymous - agrees.

"Operators are piling back in, taking more risks and getting more funds out because the prospects of getting away with it are seen to be higher.

Bent advisers

Last December David Varney, chairman of HMRC, said that "MTIC is one of the most serious attacks on the tax system we have ever seen".

1st floor offices of former Beveridge Gauntlett law firm in Yateley
'Rosebank Chambers' where 200m was laundered from a VAT fraud

He suggested that VAT fraudsters are being helped by a small number of qualified tax advisers.

The potential role of such professionals was illustrated this month at Southwark Crown Court.

Laurence Ford, a 56 year old legal executive, was sent to jail for six years for laundering 200m from a VAT fraud through the client account of his employers.

They were the small law firm Beveridge Gauntlett, which was closed down by the Law Society three years ago.

The firm's grand-sounding address of Rosebank Chambers was in fact a first floor office above an off-licence and estate agent, in an ordinary shopping parade in the village of Yateley, near Aldershot in Hampshire.

However the HMRC's attitude has angered Stephen Coleclough of the Chartered Institute of Tax Advisors.

He acknowledges the possibility of dishonest advisers taking part in the frauds but says Varney has done nothing to back up his claims.

"Why won't they tell us who they are?" says Coleclough.

"I've personally said 'give me their names', but he gave me a load of nonsense about how it is confidential information, even though the Commissioners for Revenue & Customs Act 2005 gives them the power."

The carousel

The carousel frauds are known as Missing Trader Intra Community frauds because they take advantage of the VAT rules that apply to trade within the European community.

If you see the charts of how it's done, it's mind-boggling
Industry expert

When goods are exported from one EU country to another, the importer does not have to pay VAT, but does charge it as soon as he sells on the goods domestically.

After collecting a lot of VAT, which should be handed over to the taxman, the dishonest importer can simply disappear with the money.

Likewise, when goods are exported to an EU country the exporter can reclaim from the taxman the VAT he has been charged.

But if the goods go round in a series of transactions during which that VAT was stolen at some point, then the taxpayer loses huge sums to the fraudsters.

Increasingly the carousel involves moving goods outside the EU, for instance to Switzerland, which makes it harder for the taxman here to prove that a carousel does in fact exist.

"Sometimes they move the carousel to broaden it to as many as 30 or 40 points - they may go on and offshore, perhaps running two mini-carousels working on and offshore at the same time," one expert says.

"If you see the charts of how it's done, it's mind-boggling."

New tactics

Fraudsters are probably clever enough to change the IMEI numbers of their phones.

Once we have identified an accruing debt, we go after them for provisional liquidation
Paul Gerrard , HMRC

Gerrard is not unhappy if they try.

"That forces the phones out of the supply chain, slows them down and costs them money," he says.

"If the IMEI number is changed, the disruption that will cause, the cost that will be caused, will be a significant deterrent."

Since the start of 2006 he and his colleagues have been deploying a variety of other tactics.

For instance they are refusing to register suspect traders for VAT.

And that has forced criminals with existing VAT numbers to keep them for longer and to rack up much bigger VAT bills while running their frauds.

Gerrard says this gives his staff an opportunity to pounce.

"They get the number and keep it and accrue whatever debt they can.

"Once we have identified an accruing debt, we go after them for provisional liquidation."

Some applicants for VAT registration numbers are also being asked to put down a bond, effectively a deposit, in case they default without paying VAT.

And traders submitting suspect claims for VAT refunds are being told they cannot have the money if HMRC thinks there is evidence the transactions were part of a carousel fraud.

"If we can show that someone knew or had means of knowing that this was a carousel, then they are engaged in abuse of the tax system and we will stop their repayments," says Gerrard.

HMRC says it has now deployed hundreds of staff to sieve out these suspect refund claims.

European action

The government is also trying to get the permission of the European authorities to change the way VAT is levied in the UK on specific items such as mobile phones or computer chips.

However the government is not expecting the EU authorities to approve a change for the UK until the end of the current financial year.

So in the meantime, customs officers will have to spend more and more time, scanning mobile phones, checking paperwork and knocking on the doors of suspected fraudsters.

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