The Treasury's coffers were deprived of £12bn of VAT last year, after the difference between real and theoretical receipts increased for the third year running.
The so-called ‘VAT gap’ grew by a percentage point to 15.7%. Leaks in the system included ‘missing trader’ fraud (such as carousel fraud), tax avoidance and other losses due to non-compliance.
The government has set a target to reduce the ‘VAT gap’ to 12% in 2005/6. It claimed some success in tackling missing trader fraud, which cost the taxpayer up to £2.6bn in 2002/3, down 5% from 2001/2.
The reduction followed a crackdown launched in September 2000 and a cash injection given in April 2002. The abuse takes advantage of VAT exemption on goods traded between EU countries. Bogus traders import goods tax-free, sell them, and disappear along with the 17.5% VAT due to the taxman.
In the pre-Budget report, Gordon Brown announced further measures to tackle carousel fraud, the complex version of missing trader fraud in which goods are sold through a series of companies across the EU.