HM Customs and Excise have increased their efforts to tackle losses from fraud and error on VAT, which in 2002-2003 they estimated at £11.9 billion. This was an increase over the £10.6 billion they estimate to have been lost in 2001-2002, but there are signs of improvement with a reduction in one of the most serious types of VAT fraud, missing trader fraud.
According to today’s report from the National Audit Office, Customs estimate that losses from VAT missing trader fraud have gone down from between £1.77 billion and £2.75 billion in 2001-02 to between £1.65 billion and £2.64 billion in 2002-03. Customs have increasingly targeted their work to detect and stop this type of fraud whereby bogus traders register for VAT, buy goods VAT free from another EU Member State, sell them on at VAT inclusive prices and then disappear without paying over to Customs the VAT they have collected.
Customs estimate that in 2001-02 between 125,000 and 180,000 traders operating in the shadow economy had not registered for VAT resulting in losses of £400 million to £500 million. By working closely with the Inland Revenue and Department for Work and Pensions, Customs detected in 2002-03 almost 4,000 traders who should be registered for VAT and identified additional revenue of £65 million. They also ran a one-off incentive scheme from April to September 2003 to encourage businesses to come out of the shadow economy voluntarily. This led to a further 3,900 traders registering by the end of 2003, with additional revenue of around £26 million. The report recommends that Customs should disseminate the lessons learned to help other Departments assess the value of similar schemes.
Customs estimate that between £2.5 billion and £4 billion was lost from general non-compliance by registered traders in 2001-02. These include losses from businesses making mistakes on their VAT returns and from deliberately under-reporting their VAT. Through their annual programme of checks on traders, Customs identified additional VAT payable of over £3 billion in 2002-03. Customs are providing improved guidance and advice to help businesses comply. They are also looking at how to update the estimates of loss to assess whether their response is proportionate to the risks.
Customs seek first to stop VAT frauds to prevent any further losses and may impose a civil evasion penalty (a fine) or prosecute those involved. The number of cases where civil evasion penalties have been imposed has fallen from 898 in 1997-98 to 276 cases in 2002-03, the result of Customs’ targeting more complex and larger value cases. The number of criminal prosecutions finalised in court has remained broadly constant in recent years. Of the 86 completed prosecutions for VAT fraud in 2002-03, 69 resulted in convictions. Cases successfully prosecuted took more than two years on average to complete, from investigation to prosecution. The lack of availability of court time can cause delays and the report recommends that Customs should assess with the Department for Constitutional Affairs whether there are opportunities to reduce the time taken.