Letter from the Paymaster General to the
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 fraudknown as carousel fraudinvolves 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.
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
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,
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
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
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.
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
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
strategybringing 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
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
Joined cases of Axel Kittel and Recolta Recycling (C-439/04 and
Balance of Trade in Goods, ONS, November 2006. Back