According to the Office of National Statistics, some GBP5.5 billion of the UK's GBP59.5 billion exports in the first quarter of 2006 can be written off because of carousel fraud. This is up sharply from the same period last year, when the ONS estimated that GBP1.1 billion of exports were affected by the fraud.

Carousel fraud, also known as missing trader intra-community fraud (MTIC), involves the importation of goods (typically high value small electronic goods such as mobile phones and computer components) free of value-added tax. The goods are then sold on by companies with the 17.5% VAT added, following which the firms disappear, having pocketed the difference. In many cases, the goods are passed along a long chain of traders, making the fraud hard to detect and the perpetrators difficult to apprehend.

Originally, most carousel chains only involved EU member states. More recently, there has been an increase in carousel chains that include non-EU countries, for example, Dubai and Switzerland.

The findings have huge implications for the Chancellor's budget calculations, due to the amount of value added tax receipts foregone by the Treasury. It has been estimated by the government that it lost up to GBP1.9 billion in VAT revenues in 2003/4 because of carousel fraud, but the ONS figures suggest that the problem is now much more pervasive, and some analysts believe the annual revenue loss could now stand at GBP10 billion.

However, the ONS qualified its estimates by warning that carousel fraud was difficult to quantify and hard to measure reliably.

Nonetheless, some economists are forecasting that the impact of the fraud will mean that the Chancellor will fail to meet his Budget forecasts this year, raising the prospect that he may need to increase other taxes to cover the shortfall.