'Step-change' in UK fraud level

Mobile phone VAT rules have been changed to reduce fraud

Fraud levels in the UK have undergone a dramatic change and show no sign of turning back, according to KPMG's latest Fraud Barometer.

In the first six months of 2007, fraud cases came to court with a value of £594m. This is more than the whole of 2000, 2001, 2003 or 2004.

The government was the biggest victim, with £485m of the total against it.

Much of that total was "carousel" fraud - a VAT fraud that takes advantage of the EU tax system.

"The good news is that more fraud is being detected and prosecuted in court," said Hitesh Patel, a director in KPMG Forensic.

"The bad news is that this is probably - at least in part - because more fraud is being committed."

Carousel fraud

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.

Four cases of carousel fraud in the first half of this year amounted to a total of £440m.

The government hopes carousel fraud will be reduced by changes, introduced at the beginning of June, to the way VAT is charged on mobile phones and computer chips.