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UK VAT Fraudsters 'Laughing All The Way To The Offshore Bank', Report Claims

by Jason Gorringe,, London

16 August 2007

A new study by business advisors BDO Stoy Hayward has concluded that measures being used by the UK authorities to crackdown on VAT fraud are unlikely to have a deterrent effect on the criminal gangs that perpetrate such crimes, who will continue "laughing all the way to their offshore tax haven".

BDO Stoy Hayward's latest FraudTrack research suggests that crime does indeed pay, particularly if you are a business fraudster in the UK, as the low risk of prosecution is combining with lucrative rewards and low sentences to make an attractive environment, which is tempting criminals and not deterring opportunists.

According to the report, business fraud has risen by 42% in the first 6 months of 2007 compared with the same period last year, to reach GBP538 million (US$1.07 billion). Major VAT and tax frauds account for GBP468 million, more than in the whole of 2006.

Multi-million pound VAT frauds are typically conducted by gangs with criminal links. Some of these are being prosecuted after lengthy investigations by HM Revenue & Customs. However, the report said that the potentially huge rewards and relatively light sentences for prosecuted criminals mean that these frauds are becoming ever more attractive to criminals. The average sentence (not time served) for frauds of over GBP50,000 is 3.05 years (1.98 including those who get non-custodial sentences), while the average sentence for the largest frauds (over GBP50 million) is just over 6 years.

The UK government is introducing a 'reverse charge' mechanism on certain items in order to limit the opportunity for carousel fraud to be committed. However, BDO Stoy Hayward predicts that recent legislation to reduce these VAT carousel frauds will not prove effective, as gangs will re-apply the methods used to commit these frauds – initially involving mobile phones, tobacco, alcohol, fuel and cars - onto other easily transportable high-value items. So far in 2007, just 23 VAT carousel frauds accounted for the GBP468 million in tax fraud for the first 6 months of the year - 220% above the whole of 2003 (GBP135 million).

The Midlands has become the UK’s fraud hotspot, with GBP312 million (nearly 60% of the total) being undertaken by businesses and people based in the region – typically through VAT frauds. In terms of the number of reported frauds, London had the most (a third), followed by the North East (16%), the Midlands (14%) and the North West (12%).

"Sadly crime does often pay at the moment if you are a fraudster, which explains why large frauds are on the increase – this is a crime driven by greed, not need," commented Simon P. Bevan, the national head of BDO Stoy Hayward’s Fraud Services Team.

He added:

“Professional criminals have been quick to notice the millions that can be made from VAT carousel frauds. While there has been a crackdown I am sceptical it will halt this avalanche of huge frauds against the taxpayer. If you make tens of millions, and then succeed in keeping even a few per cent hidden when you get caught, then you will end up with a small sentence and a large amount hidden in an offshore bank."

“When it comes to frauds against businesses, if you are discovered there is only a small chance of being prosecuted. When a fraud is discovered, all but the very largest are not a priority for the police given their limited resources. Businesses, not surprisingly, focus on getting the money back and protecting their reputations – so few of such cases, less than 15 per cent, result in a prosecution. In this case, the worst a fraudster will face is losing their job and having to repay most of their ill-gotten gains."

Bevan concluded that: “Many fraudsters are laughing all the way to their offshore tax haven. Fraud is set to keep increasing as long as others see it is a safe route to making large amounts of money illegally, particularly in the case of VAT frauds, where a couple of years in an open prison is not going to deter anyone with a criminal mindset."

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