FACTBOX - How carousel fraud works

LONDON Thu Aug 20, 2009 3:50pm BST

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LONDON (Reuters) - Britain is the main target in Europe of so-called carousel fraud, losing an estimated 2 billion to 3 billion pounds in potential tax revenues between 2005-6, according to HM Revenue and Customs (HMRC).

Through carousel fraud, also called missing trader intra- community value-added tax (VAT) fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the tax to the government.

HMRC arrested seven men and two women in London on Wednesday following a suspected a 38 million pound value-added tax fraud related to carbon credit trading.

Britain said last month it would make carbon trading exempt from VAT in response to the suspected scam.

Until now, carousel fraud has mainly been confined to mobile phones, computer chips and electronic devices like MP3 players.

See below for details on how the fraud works and some of the biggest carousel fraud scams in Britain.

HOW DO FRAUDSTERS DO IT?

The fraud has high returns over a short period of time. It is quite difficult to prove, meaning convictions are sparse.

A simpler version is 'acquisition' fraud where the goods are imported VAT-free into Britain from countries in the European Union. Once the goods have been sold on in Britain, the importer goes missing, taking with him the VAT, which is collected as part of the sale.

A more complicated form is called "carousel fraud." Goods are imported VAT-free but are not sold for consumption in the home market. The goods are sold through a series of companies, each liable to VAT, before being exported, possibly even back to the original seller.

In this type of fraud, the first link in the chain often goes missing without accounting for the VAT. The final link in the chain reclaims the VAT it has paid from the government before disappearing.

Previous examples of carousel fraud include 12 arrests in 2003 for a 25 million pound computer chip scam, according to the UK Treasury's website.

Twenty one people were convicted in 2008 in connection with a 138 million pound mobile phone VAT fraud following an investigation by HMRC, according to the Revenue and Customs Prosecutions Office.

(Reporting by Nina Chestney; Editing by Anthony Barker)

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