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Last Updated: Monday, 18 September 2006, 10:13 GMT 11:13 UK
Clampdown on VAT fraud
A mobile phone
The new VAT system will affect a wide range of goods, not just mobile phones
A new Value Added Tax (VAT) system aimed at stopping so-called "carousel" fraud is set to start on 1 December, HM Revenue & Customs has said.

The new tax system, called a "reverse charge", means that for certain electronic goods only the final retailer will be able to levy VAT.

It aims to stop criminals stealing VAT charged on goods imported free of the tax from elsewhere in the EU.

The fraud is estimated to have cost the government 8.5bn since 2001.

In 2004/05, the HMRC estimated it lost between 1.2bn-1.9bn, and the losses for the 2005/06 tax year are expected to be much higher.

The scam has been dubbed "carousel fraud" because the goods, particularly mobile phones, are often exported and then re-imported in a series of contrived transactions.

If this happens then HMRC repays VAT to the criminals when the goods are exported to another EU country, but suffers huge losses as the VAT was never collected when the items were imported in the first place.

Accounting headache

The deadline of 1 December for the introduction of the new VAT system depends on final authorisation from the EU Commission, something the UK government has been seeking since the start of the year.

Mobile phones
Computer chips
Hard discs, USB drives etc
MP3 players
GPS systems
Games consoles

But HMRC admits the new system will be a big headache for the legitimate VAT-registered importers and sellers of the goods.

"Implementation of the reverse charge requires fundamental changes to the accounting systems of businesses trading in the relevant goods," it said.

Although it is briefing the software industry on the necessary changes, HMRC acknowledges that making the changes in time will be a "challenging timeframe".

As a result, much software will not be ready until early next year and many businesses will, at first, have to carry out the new accounting by hand, which could be complicated.

European campaign

This forthcoming change is just one part of HMRC's plan to attack carousel fraud, which is regarded as the single biggest threat to the tax system throughout Europe.

Last month, international co-operation led to UK and German tax officials seizing more than 30,000 mobile phones at Frankfurt airport and on the German-Swiss border.

In the UK, HMRC has established a database called Nemesis to register all imported and exported mobile phones so the authorities can tell if they are being regularly imported and exported on a "carousel".

In addition, more than a thousand HMRC staff have been deployed to scrutinise attempts by businesses to register for VAT and to check their claims for VAT refunds.

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