Tax fraud has reached its highest level since the onset of the financial crisis, as VAT evasion has exploded, costing Britain more than £3bn a year.
The size of the so-called “VAT gap” due to fraud, the difference between the amount of tax HMRC expects to receive and what it actually collects, is reckoned to have reached £3.3bn, or enough to fund a 1p reduction in the tax of every UK taxpayer.
VAT evasion has become one of the biggest costs to the exchequer and is largely due to HMRC being “significantly under-resourced”, according to BDO’s 'FraudTrack’ report.
It is estimated that about half of the fraud is down to professional fraudsters, while the rest is the result of general non-compliance and deliberate evasion by legitimate businesses.
Simon Bevan, from BDO, said the tax was largely lost through two types of fraud: 'missing trader fraud’ and 'carousel fraud’ that both involve methods of evading UK VAT through either outright evasion or creating a web of fictitious trades in order to falsely claim tax relief.
“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,” he said.
Mr Bevan points out that Germany and the Netherlands have allocated significant amounts of resources to pursuing VAT fraud with the result that cases of evasion in both countries have decreased.
“If we focus on serious VAT fraud and resource HMRC accordingly we can immeasurably improve the public purse in a relatively cost effective manner,” he said.
Figures from international law firm Pinsent Masons show that the number of information requests on individuals’ tax affairs made by HMRC to foreign governments in the last financial year declined by 40pc to 640.
Phil Berwick, a partner at Pinsent Masons, said the fall was likely because the authorities had “picked off most of the low hanging fruit” and was reaching the limits of its ability to investigate potential tax avoidance.
“HMRC’s heavy workload is catching up with it. The recent NAO [National Audit Office] report on HMRC’s compliance performance revealed that HMRC had 41,000 open avoidance investigations. HMRC has pushed very hard on compliance recently and may be hitting capacity,” said Mr Berwick.
Last week, HMRC took the step of publishing on its website a rogues’ gallery of Britain’s of 32 convicted tax cheats, complete with their names, faces and details of their crimes.
Among those featured on the list were a group of four men jailed for combined total of 21 years and three months for an alcohol smuggling scheme worth more than £50m.
The rogues’ gallery, which received 660,000 hits, is part of an £917m investment by the Government in measures to prevent tax evasion.
David Gauke, Treasury minister, said that he hoped the publishing of the pictures would show “it always makes sense to declare all your income, and tax dodgers are simply storing up trouble for the future”.
In the Autumn Statement, Chancellor George Osborne announced a further £77m in funding to help HMRC pursue tax cheats.