Select Committee on Treasury Written Evidence


Letter from the Paymaster General to the Chairman

UPDATE ON MTIC FRAUD

  I am writing to provide you with further background to the 2005-06 estimates of Missing Trader Intra Community (MTIC) fraud published today in a HM Revenue and Customs publication "Measuring Indirect Tax Losses, 2006", and to update you on the impact of HMRC's strategy to date in 2006-07. A copy of this document is enclosed.

  The latest estimates from HMRC, published today, show that the scale of attempted fraud over 2005-06 was between £3.75 billion and £4.75 billion. HMRC's operational strategy means that not all attempted fraud is successful. HMRC estimates that the potential impact of MTIC fraud on the VAT receipts over this period was between £2 billion and £3 billion.

  Given the speculation over the scale of this fraud, I thought it would be helpful to explain these estimates in more detail. This is set out below.

  As you know, MTIC fraud is a large-scale organised criminal attack on the EU VAT system. The most serious form of the fraud—known as carousel fraud—involves a series of contrived transactions within and beyond the EU, with the aim of creating large unpaid VAT liabilities and fraudulent VAT repayment claims. The UK is at the forefront in Europe in understanding and measuring MTIC fraud, and introducing a strategy comprising operational interventions and legislative tools to tackle this increasingly complex and sophisticated fraud.

ESTIMATES OF MTIC-RELATED ACTIVITY 2005-06

  During 2005-06, the fraudsters involved changed their behaviour in an attempt to circumvent HMRC's controls. As a result, the previous published measure of attempted MTIC fraud, though a sound measure up to then, has failed to adequately take account of the full range of attacks on the system over this period. However, HMRC has used operational indicators to produce new estimates for the fraud in 2005-06, published today. The estimates show the scale of attempted MTIC fraud was between £3.5 billion and £4.75 billion in 2005-06. HMRC's operational strategy means that not all attempted fraud is successful and results in a loss to the exchequer. HMRC estimates that the potential negative impact of MTIC fraud on the VAT receipts in 2005-06 was between £2 billion and £3 billion. Much of this money is the subject of ongoing criminal investigations involving international co-operation.

  The Government has been proactive in tackling MTIC fraud, and introduced anti-fraud legislative measures in 2003 and again in this year's Finance Act. However, the level of attempted fraud is driven largely by the fraudsters' confidence and their behavioural response to the changing environment in which they operate, including the outcome of legal action. The escalation in the scale of the attack on the VAT system in 2005-06 reflects a combination of factors. One significant factor was the fraudsters' response to a European Court case[7], which created an extended period of legal uncertainity between the Advocate General's Opinion in February 2005 and the Court's ruling in January 2006. The ruling took away one of the legal defences used by HMRC to deny suspect VAT repayment claims.

  This prompted a significant increase in the trading activity associated with MTIC fraud during the second half of 2005-06, for which there was no commercial or economic rationale.

  During 2005-06 HMRC took proportionate steps to strengthen its operational response to this attack, including:

    —  working closely with other law enforcement agencies in the UK and beyond to identify and destabilise the criminals behind the fraud; and

    —  introducing stronger frontier controls and more rigorous procedures to capture and record key information about the goods, people and tactics used in carousel frauds, and to share that information with international partners.

  Further details of HMRC's operational response during 2005-06 will be published shortly in their Annual Report 2005-06.

  Despite these efforts, while suspecting that some VAT repayment claims were associated with fraud, the increasingly complex nature of the fraud meant that over this period HMRC did not always have sufficient evidence necessary to deny all suspect claims. Nevertheless, these activities did help to mitigate the negative impact on VAT receipts in 2005-06 associated with the increasing scale of the attack on the system.

IMPACT OF HMRC'S STRATEGY IN 2006-07

  In 2006-07 further criminal and civil investigations have been instigated in respect of the repayments made during 2005-06 where HMRC contues to suspect that they were associated with fraud. Working closely with international partners, HMRC's investigations have followed global money trails to locate the proceeds of crime. A substantial number of accounts have been frozen, denying the fraudsters access to their money and severely restricting their ability to fund further fraudulent activity.

  These investigations are uncovering evidence that can be used to deny fraudulent VAT repayment claims. In addition, a subsequent ruling by the European Court[8] in July this year has provided HMRC with a strengthened basis on which to refuse suspect and abusive VAT repayment claims. HMRC has also re-deployed a further 600 additional staff to the MTIC strategy—bringing the total to over 1,400. All of this has enabled HMRC to carry out in-depth checks on the vast majority of suspect VAT repayment claims submitted since April this year. These claims will not be paid unless and until HMRC is satisfied they are properly due.

  Operational indicators are pointing to a much improved position in 2006-07. A significant proportion of attempted frauds are now being stopped and the strengthened strategy has greatly reduced the level of attack from attempted fraud in recent months, partially reflected in the latest ONS published trade statistics[9], which suggest MTIC-related activity fell sharply over the summer, by around two thirds compared with late 2005-06 and early 2006-07. The success of a significant proportion of these interventions will depend on the outcome of criminal and civil litigation over coming months and years.

  The Government is determined to sustain the impact of its strategy and to ensure that HMRC has the tools it needs to combat MTIC fraud. As announced in today's Pre Budget Report, a further 100 HMRC staff are being redeployed to MTIC strategy, bring the total to 1,500. As part of its wider strategy of working internationally to combat cross-border fraud, the Government is continuing negotiations with its European partners to secure introduction of a reverse charge VAT accounting system for goods most commonly used in MTIC frauds. Further legislative measures will be brought forward in Budget 2007 as required.

  I hope you find this helpful.

  I am placing a copy of this letter in the Libraries of both Houses.

Dawn Primarolo MP

6 December 2006






7   The joined cases of Bond House Systems Ltd and others (C-484/03, C-354/03, C-355/03). Back

8   Joined cases of Axel Kittel and Recolta Recycling (C-439/04 and C-440/04). Back

9   Balance of Trade in Goods, ONS, November 2006. Back


 
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