HEALEY HAILS SUCCESS OF VAT CRACKDOWN

Treasury Minister John Healey says the Government’s strategy to tackle VAT fraud has saved billions of pounds in revenue, as Customs today reported their latest success, arresting 12 fraudsters involved in a multi-million pound bullion and computer chip fraud.

Chairing an 11 Downing Street seminar with representatives from the mobile phone and computer chip industries and other stakeholders, Economic Secretary to the Treasury, John Healey MP, said Customs’ strategy to significantly reduce the losses from VAT Missing Trader Fraud was on track and was proving the value of the UK Government’s pioneering efforts to tackle the world-wide problem of tax fraud. Mr Healey said:

“VAT fraud is not a victimless crime. It lines the pockets of criminals, forces legitimate traders out of business, and robs the honest taxpayer of more than £2 billion a year. But we are showing we have the right strategies, the right skills and the right people to crack the crime gangs, and protect the revenue we need for our public services.”

“We were the first in the world to measure our VAT losses and bring forward a strategy to tackle them, and we are the first in Europe to address the problem by targeting action at the fraudsters not by imposing blanket regulation on every business. That is why the people I have spoken to today have applauded our efforts not criticized them."

The fraud relies on bogus trade in high-value, low-volume consignments like mobile phones and computer chips to steal huge amounts of tax in short spaces of time, by not paying VAT over to Customs, and subsequently submitting claims for VAT repayments. As well as describing the overall impact of Customs’ strategy,
John Healey told the seminar about Customs’ success in cracking individual criminals and gangs.

In the latest such success, Customs reported 11 dawn searches of businesses and premises in London, Birmingham, Berkshire, Essex and, leading to the arrest of 12 people thought to have pocketed £25 million in a 25 day period last year by trading in computer chips and gold bullion on which VAT was never paid. Details of the investigation– codenamed Operation Devout – were released for the first time today.

Notes for editors:

1. VAT Missing Trader Fraud, of which the most abusive variant is 'carousel' fraud, is a Europe-wide systematic attack on the VAT system orchestrated by sophisticated criminals. It involves a fraudster obtaining a VAT registration number in the UK to purchase goods VAT free from a business in another EU Member State under the rules which govern intra-community transactions between EU businesses.

2. The fraudster sells the goods at a VAT-inclusive price to a second UK trader, and disappears with the full amount without paying over the VAT to Customs. The second trader reclaims from Customs the VAT paid on the purchase, leaving the Exchequer to foot the bill for the fraud. In ‘carousel’ fraud, the same consignment of goods are sold through a series of contrived transactions back and forth between Member State to steal the sums charged as VAT every time the goods go around the circle.

3. This type of fraud grew at the onset of the Single Market, and arrived in the UK after several other Member States put off the fraudsters by complicating and delaying their normal VAT registration and reclaim processes. In the UK, the problem escalated at a rate of up to £0.75bn per year from 1999 and cost the Exchequer £1.7-£2.75bn in 2001-02.

4. A national Customs strategy to tackle the problem was launched in September 2000, with over 400 staff deployed, aiming to halve the total losses by the end of 2003-04. If that action had not been taken, it is estimated annual losses would have significantly increased. Instead, it is estimated that the fraud is now in decline and heading back below the levels last seen in 1999.

4. In addition to investigating the gangs behind the fraud, the Government introduced new legislative measures in April 2003 to deter businesses from involving themselves in Missing Trader supply chains. Between March and May 2003, consignments of mobile phones from the UK to the Netherlands fell from £300m in value to just over £30m, with VAT repayments linked to the movement of these phones falling in line.

5. The effort to tackle Missing Trader Fraud is a key part of Customs’ wider strategy, announced in the 2002 Pre Budget report and the first of its kind in the world, to measure and tackle the full range of revenue losses affecting the VAT system, encompassing similar efforts to block VAT avoidance schemes, tackle VAT evasion by businesses operating in the shadow economy, and help ordinary, normally-compliant businesses pay the right amount of VAT at the right time.

6. Under cautious assumptions, audited by the NAO, the strategy as a whole was estimated to produce £1.4bn per year in additional VAT revenues by 2005-06.

7. The criminals engaged in Missing Trader Fraud have close links to the organised crime gangs engaged in other large-scale tax fraud, smuggling of excise goods, and drug-trafficking with similar levels of organisation, finance, and use of firearms and intimidation of ordinary businesses. Customs tackle these risks in an equally-flexible way, from intelligence-led investigations to regulatory changes designed to prevent the exploitation of weaknesses in the system.

8. In addition to the arrests announced today, recent notable cases have included:

a £120m fraud with 39 arrests at 70 properties across the UK and Spain, where shotguns, a machine gun and a revolver were also seized;
a defendant with a criminal record of robbery and violence stretching back to 1959, arrested along with a Corsican national with known criminal connections across Europe, and a British national with a £270,000 Docklands flat (paid for in cash), a £200,000 motor launch and a £120,000 fleet of Mercedes;
a 21 year old supposedly supplying 10% of the entire world production of one type of computer chip in a three-month period – in reality sending the same chips round and round in circles;
an £11m computer chip fraud resulting in 8 convictions, sentences totalling 27 years, and a record £7m VAT confiscation order, where one of the defendants added parts to a smiley-face doodle each time the boxes came round the carousel;
boxes of goods circulating on carousel frauds up to 35 times by which time they are often falling apart despite the fragile contents;
Customs detecting single shipments as large as 14 tonnes of mobile phones - enough to fill the cargo hold of a jumbo jet; and
Customs detecting carousel consignments of computer chips shipped to Ireland in the first half of 2002 large enough in aggregate to have supplied the entire market for that chip in Europe, Asia and Africa put together.

9. Customs will formally announce the results of its 2002-03 strategies to tackle indirect tax revenue losses, drug-trafficking and other serious crime next month, and will announce similar success in its other major tax fraud strategies related to cigarette smuggling, cross-Channel excise smuggling, and abuse of rebated oils and red diesel.

10. John Healey, Economic Secretary to the Treasury and Customs Minister, asked business representative groups and individuals from the mobile phone and computer chip industries and accountancy profession to attend the seminar at 11 Downing Street, where he presented the latest results of the strategy, and invited the views of attendees.

Press enquiries only please contact:
HM Customs and Excise Marketing and Communications Division
Tel: 020 7865 5715/4857
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Tel: 020 7620 1313

E-mail: Press.Office@hmce.gsi.gov.uk
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Press notices July to December 2003 index