Carousel fraud often centres on mobile phones

This is up by 50% from the first three months of 2006, Office for National Statistics figures show.

So-called carousel fraud is involved in many of the cases, causing vast losses to HM Revenue and Customs (HMRC).

The latest HMRC figures indicated an estimated VAT fraud loss to the UK in 2004-5 of between �1.1bn and �1.9bn.

Losses multiplied

Carousel fraud, which involves small, high-value goods such as mobile phones or computer chips, depends on the ability of criminals legitimately to import goods free of VAT from within the European Union.

They then charge VAT when they sell on the goods to the supply chain, but instead of handing over the tax to HMRC they simply keep it and disappear.

The losses are multiplied if the goods are then re-exported, allowing the final trader to reclaim VAT that has been paid.

If the goods go round in an elaborate circle the losses to the government multiply rapidly. They also effect VAT revenues in other countries if they are passed through other EU member states.

Tax changes

Fraudulent activity is estimated to be fifteen times the level of 2004 - leading to fears that the level of trade associated with VAT fraud could be as high as �30bn in 2006.

In July, HMRC said it was planning to change the system for collecting VAT on certain imported electronic goods.

It has been given permission by the European Tax Commissioner to alter the tax system so that VAT will only be collected when items are sold by a retailer.