Senior accountants are calling on government to pay greater attention to the cost of VAT fraud - which accounts for 41% of the UK's total fraud figure.
In particular, BDO partner Simon Bevan has named Missing Trader and Carousel fraud as the two types of serious VAT fraud committed by professional criminals.
The firm's FraudTrack figures depict tax fraud on the whole as accounting for nearly half (44%) of all fraud reported in the UK - the highest level since 2007 - while the UK VAT gap is around £10bn, with fraud accounting for about one third of this.
But BDO says the UK is not alone in facing this issue, now also an EU-wide problem with the 27 member states having a combined VAT gap of €100bn (£81bn). The EU is potentially losing around €33bn due to VAT fraud in this wider market, according to Ben Terra, professor of Law at Amsterdam and Lund Universities.
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, BDO said.
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 while half is produced by a relatively smaller number of professional fraudsters committing Missing Trader Fraud and Carousel Fraud.
Said Bevan: '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. 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.'
Bevan said 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,' he said.
Straughans' partner, and former HMRC inspector Mike Fleming, suggested instead that 'HMRC's time and money would be better spent on the still-bigger problem we have with VAT fraud' instead of using it to combat avoidance activity.
In exclusive comment to Accountancy, Fleming said: 'In August 2012, HMRC published details of its 'most wanted' tax fraudsters. Between a mere 20 individuals, the amount of tax unpaid totalled £ of a billion. Compare this to the deficit created by tax avoiders across the UK, currently £2.5bn. The amount of tax at risk from tax avoidance is dwarfed by the scale of the problem we have with VAT and other direct taxes which make up over 60% of the £35bn "tax gap". My feeling is that HMRC's current focus on tackling tax avoidance is political, not practical.'
