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Last Updated: Friday, 1 June 2007, 08:28 GMT 09:28 UK
New rules to stop carousel fraud
Mobile phone
The new tax system applies only to mobile phone and computer chips
New measures to counter a multi-billion pound tax fraud have come into effect.

Retailers and wholesalers trading in mobile phones and computer chips will have to change the way they collect and account for value added tax (VAT).

The new tax policy, known as a "reverse charge", is aimed at stopping the import and export of these goods as part of so-called "carousel" fraud.

HM Revenue & Customs (HMRC) says it will halt the opportunity for criminals to make bogus VAT reclaims.

However some experts say that criminals will simply switch their attention to other high value goods instead.

"It's not going to be the whole solution," said Stephen Coleclough, a leading VAT expert from the Chartered Institute of Taxation.

"Criminal gangs are likely to swap into other high value items, such as diamonds. I have even heard of car tyres being used."


The UK government has lost billions of pounds to this fraud since the start of the decade as a result of paying out on dishonest claims for VAT repayment.

A former head of the HMRC described it as the most serious attack there has ever been on the UK's tax system.

The government has admitted that in 2005-06, the last year for which estimates are available, it lost between 2bn and 3bn.

In the past year though, the authorities seem to have clamped down on it successfully.

According to figures from the Office for National Statistics, there was 17bn worth of trade associated with the fraud in the first six months of the 2006-07 financial year.

But in recent months the value of such trade has dropped to an estimated 100m a month.

Among the measures the authorities have taken to achieve this have been:

  • the arrest of criminals in the UK and abroad
  • greater scrutiny of new VAT registrations
  • more extensive checking of claims for refunds when goods are shipped abroad
  • logging of individual mobile phones each time they are imported or exported.

The opportunity to carry out the fraud exists because of the nature of the EU's VAT system.

Contrived transactions

Traders who import and export goods between EU countries do not have to pay VAT.

Thus items can be imported, passed through a series of contrived transactions - where VAT should be collected - and then exported.

At that point the dishonest trader can submit a claim for the repayment of the tax that was never collected in the first place.

This has happened with the same goods being sent round and round across numerous EU borders - hence the name "carousel" fraud.

The new tax system, which applies in the UK only, will mean that anyone trading in mobile phones and computer chips will no longer have to collect - or pretend to collect - VAT until the items reach the end of a chain, for instance by being sold in a shop.

Thus anyone who exports the goods will no longer have an apparently legitimate reason for claiming a refund.

"The retailer won't be selling a million pounds of mobile phones in one go, and if he has a shop in the high street he's unlikely not to pay because the tax man knows where to find him," Mr Coleclough added.

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