VAT fraud big enough to skew trade figures

The Office for National Statistics said yesterday that a renewed outbreak of so-called "missing trader fraud" had so skewed Britain's trade figures that it could not have any confidence in them.

The discovery could mean the loss to the government of billions of pounds in VAT revenues, although the ONS insisted the amounts involved were unclear at this stage.

Missing trader fraud occurs when a trader imports goods from another country VAT free, sells them on to another trader with VAT included and then disappears without paying the VAT to the government.

The goods, usually mobile phones or computer chips, are often re-exported, at which point the exporter reclaims the VAT from HM Revenue and Customs, resulting in revenue loss. The goods can sometimes be imported and exported many times, with the VAT reclaimed each time. This is known as "carousel" fraud.

The problem was first highlighted in 2003 when it was estimated losses to the Exchequer had surged from £2.8bn two years earlier to £11bn. A clamp down by customs officials reduced the losses to £1.6bn last year. But now HMRC and the ONS fear the problem has spread beyond the EU and is now affecting Britain's trade further afield.

Government statisticians say they believe the problem has "increased substantially" in recent months, but remain unsure of the true extent of the fraud.

"We can't put a number on it. We have no handle on the scale of it. The problem has only been brought to our attention in the past 10 days," said Caroline Lakin, who compiles the trade figures. She said an investigation into the new problems had been launched.

ONS statisticians would not say which countries might be involved but their figures showed a £500m leap in exports to Dubai in June compared to June last year and a £144m rise in exports to Russia.

Shadow trade and industry secretary David Willetts said: "It is shocking that VAT fraud is happening on such a scale that there is a major distortion to our trade statistics.

"The government has known about this for some time, but hasn't come clean. [Gordon] Brown goes about closing tax loopholes, but he's much better at imposing stealth taxes on the rest of us than catching the real fraudsters."

The missing trader problems cast doubt on what otherwise looked like a relatively healthy set of trade figures, showing a sharp narrowing in the goods trade deficit in June thanks to record exports both to the EU and non-EU countries.

The ONS said the goods trade deficit narrowed to £4.3bn from £5bn the month before and was the narrowest deficit since March last year. The non-EU deficit fell to just £1.4bn, the smallest since April 2003. The usual surplus in services trade widened to £1.8bn, the biggest since April 2004.

If genuine, the higher export figures suggest that the country may be starting to benefit from a renewed pick-up in the world economy and signs of a recovery in the eurozone, the destination for half of Britain's goods exports.

"These numbers seem to suggest domestic demand has stabilised as global growth has improved, which will provide some comfort for the MPC," said John Butler, UK economist at HSBC.

The Bank of England's monetary policy committee, which last week cut interest rates in the face of slowing economic growth, has long been hoping that the traded goods sector would benefit from the strong world economy. But until now there has been little sign of that happening.