According to BDO’s new FraudTrack report released today, the current UK VAT gap, which is the difference between what HMRC collects and what it expects to collect, is around £10bn.
It says the gap is due to the Revenue being “significantly under-resourced," and urges the government to commit further resources to tackle evasion.
However, a HMRC spokesperson refuted the claims, saying, "We do not believe that there has been an increase in VAT fraud. HMRC’s latest estimate of the VAT gap shows a decrease from 10.1% in 2010/11 to 9.7% in 2011/12. Prosecutions remain a key part of HMRC’s Missing Trader Intra-Community (MTIC) strategy, which also includes a number of civil interventions and legislative responses.
Simon Bevan, BDO
In reality, it is the fraud element of the UK's VAT gap that is the bigger drain on the public purse
"Since 2006 the impact of the strategy has seen the estimated losses from the fraud reduce from £3-4bn per year to £0.5-1bn."
"A tax evasion campaign has been launched by HMRC as part of the government’s £917m investment to tackle tax evasion, avoidance and fraud from 2011/12. This has been added to with a further £77m over the next two years as part of December's Autumn Statement," the spokesperson added.
"HMRC is investing in a highly-skilled workforce to combat evasion. We will increase the number of staff working on compliance by around 2,500 people by 2014/15 with an additional 320 criminal investigators and 40 intelligence officers. If people continue to refuse to comply, we will find them and penalise them heavily."
According to BDO's report, around half of this tax fraud is carried out by professional fraudsters using carousel fraud and "missing trader fraud." Missing trader fraud occurs when a trader imports goods VAT-free, sells them on for a sum including VAT and then disappears before passing the tax on to the Revenue. In a more sophisticated version of the scam, called "carousel" fraud, the goods are repeatedly imported and exported, and the VAT charged each time.
Simon Bevan, the report’s author, said, “These two types of serious VAT fraud are committed by professional criminals, rather than reckless ad hoc amateurs. That VAT fraud accounts for such a high proportion of overall fraud is a function of a significantly under-resourced HMRC.”
BDO, which examined all reported fraud cases over £50,000, found that while total fraud in 2012 fell by a third from £2.1bn to £1.37bn, tax fraud in 2012 demonstrated only a relatively small decrease from the previous year.
Tax fraud generally accounts for nearly half (44%) of all fraud reported in the UK – the highest level since 2007.
Bevan said, “Politicians and the public at large are presently pointing their finger at various multinationals for allegedly not paying the correct amount of corporation tax.
"However, our latest survey of UK fraud shows that, in reality, it is the fraud element of UK’s VAT gap - the theoretical difference between what the government expects to collect in sales tax and what it actually collects - that is the bigger drain on the public purse."
BDO says that if a third of the UK VAT gap is due to fraud, that equates to £3.3bn missing from the public purse every year - equivalent to at least 1 pence off the effective rate of tax for every UK taxpayer, or enough to pay for the winter fuel allowance, free TV licences and compensate pensioners on the pensions credit.
As a show of strength last week, HMRC published over 30 of the UK’s top tax cheats on Flickr as part of its current tax evasion campaign.