Press Notice No. 36 of Session 2003-04, dated 29 July 2004
THIRTY-SIXTH REPORT: TACKLING VAT FRAUD (HC 512)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today a staggering £11 billion of VAT is being pocketed by fraudsters and cheats and those making genuine errors, and that Customs should step up its efforts to tackle these losses, and consider tougher civil penalties for evasion.
Mr Leigh was speaking as the Committee published its 36th Report of this Session, which examined the scale of Value Added Tax (VAT) losses through fraud and error; preventing and detecting fraud and other non-compliance; and investigating and dealing with fraudsters. In 2002-03 £109 billion of VAT was collected by 1.7 million registered traders and paid over to Customs. £45 billion was repaid to businesses that had paid more VAT on purchases than they had collected on sales, resulting in net VAT receipts of almost £64 billion. Customs estimated that VAT lost in 2002-03 due to fraud and error was over £11 billion. Traders may not pay the correct amount of VAT for a number of reasons including error, deliberately understating their VAT liabilities or through systematic attacks on the VAT system.
The Government has set Customs a target to stop the growth in the VAT gap and to cut it from 15.7% of the total VAT that could theoretically have been collected in 2002-03 to 12% by 2005 06. Following a major review of tax policy and administration, the Government has decided to create a new department "HM Revenue and Customs", to combine the work of Customs and the Inland Revenue.
The Committee found that Customs' work to measure the losses from fraud and error on VAT is an important first step in determining the size and nature of the problem, as well as providing a benchmark for judging progress. Customs produces annual estimates for missing trader fraud but only has one-off estimates, made in 2001-02, for the other three main areas of loss. It should regularly update these estimates, so that it can assess progress in tackling the different types of loss, alongside progress in meeting its overall target.
Between £2.5 billion and £4 billion a year is lost through non-compliance by traders. Customs should conduct a pilot investigation, drawing on the experience of the Department for Work and Pensions, to produce broad estimates of fraud and error to help judge the balance between education and advice to remedy genuine errors, and investigations and sanctions for serious abuse.
Better use of data matching with the Inland Revenue is needed to detect traders who are evading VAT by operating in the shadow economy. The recent review of the Revenue Departments confirmed the scope for greater data sharing, and recommended that the Treasury and the new revenue department should bring forward legislation to allow best use of information in the new department. Prompt exchange of accurate and up to date information on traders with other EU member states is particularly important in tackling missing trader fraud. Customs should work closely with the European Commission in devising the proposed new EU-wide VAT information exchange system to address inaccuracies and delays in exchanging data.
The scale of VAT losses suggests that more investigations and prosecutions for all types of VAT fraud would be cost effective. Customs prosecutes around 90 VAT fraud cases a year and the number of investigations resulting in civil evasion penalties has fallen to around 270 cases. In the many other cases where Customs finds under-declarations of VAT but does not launch an investigation of the trader, the maximum penalty is 15% of the amount mis-declared. Customs should analyse the level of repeat offending by traders to consider whether the number and level of penalties for under-declarations and for civil evasion should be raised to create a greater deterrent.
To achieve the maximum effect from prosecutions for VAT fraud, court time should be made available promptly so that cases are brought to trial more quickly. It can take up to a year for court time and lawyers to become available to try a complex VAT fraud case. Customs and the Department of Constitutional Affairs need to finalise and implement their proposals for reducing the delays. Once new arrangements are in force Customs should assess the effect on the time taken to bring cases to trial.
Mr Leigh said today:
"A staggering £11 billion of VAT is being pocketed by fraudsters and cheats, as well as those making genuine errors, rather than being collected for the public purse. Traders paying over the correct VAT, and the taxpayer in general, will want to see Customs step up its efforts to tackle these losses.
In particular, I urge Customs to consider tougher penalties for evasion and under declaring VAT, as a greater deterrent. Customs also needs to take advantage of the merger with the Inland Revenue to improve data matching in order to identify traders in the shadow economy."
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