By Daniel Hunter

New research from BDO LLP, the accountancy and business advisory firm, shows that tax fraud accounts for nearly half (44%) of all fraud reported in the UK — the highest level since 2007.

FraudTrack, which examines all reported fraud cases over £50,000, finds that, whilst 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.

Totalling £603m, tax fraud is roughly double the amount in 2009 (£274m) and 2010 (£309m). Moreover, BDO believes that the vast majority of public and private sector fraud is not reported.

The report’s author, Simon Bevan, states that “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”.

The current UK VAT gap is around £10bn with fraud accounting for approximately one third of this figure. Bevan states that “The vast proportion of this amount is due to carousel or missing trader fraud.”

This year’s FraudTrack figures show that VAT fraud alone accounts for 41 percent of the total UK fraud figure. This is also an EU wide problem and with the 27 member states having a combined VAT gap of €100bn (Ben Terra, Professor of Law at Amsterdam and Lund Universities) the EU is potentially losing around €33bn due to VAT fraud in this wider market.

To put this in real terms, 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.

Looking at it another way - this amount would pay for the winter fuel allowance, free TV licences and compensating pensioners on the pensions credit (£1.4bn) and still leave enough over to build 17 new hospitals (£1.9bn/£113m).

It is thought that approximately half of the £3.3bn figure (only £561m of which, according to BDO’s latest survey, was prosecuted this year) related to general non compliance due to mistake or deliberate act by legitimate traders whilst half is produced by a relatively smaller number of professional fraudsters committing Missing Trader Fraud and Carousel Fraud.

Bevan states "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.

“Anecdotally we are hearing that Missing Trader and Carousel fraud is proving difficult and time consuming to prosecute and is now not a main focus of CPS policy; we think this is a false saving. To paraphrase JFK’s 1962 Moon speech: 'We do these things not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills'.

"In recent years both the Germans and the Dutch have allocated resource to this issue and now suffer proportionally much less professional VAT fraud than other member States. If we focus on serious VAT fraud — and resource HMRC accordingly - we can immeasurably improve the public purse in a relatively cost effective manner."

Join us on
Follow @freshbusiness