Laurence Ford was sentenced to 6 years for his part in a carousel fraud

Latest ONS data suggests that trade in goods associated with the fraud was worth �1.2bn worth in August, compared with �1.6bn in the previous month.

That makes the second month in a row in which the figure has declined following a big push by the authorities.

So far in 2006, fraudulent trades are thought to have amounted to �25.5bn.

The falls in July and August have been registered in the wake of a massive rise in the priority assigned to carousel fraud by HM Revenue & Customs (HMRC).

How it works

The fraud works as criminals import high value goods such as mobile phones and computer chips, free of VAT, from other countries in the European Union.

These goods are then sold in the UK with VAT attached, but the criminals disappear with the tax they have collected instead of handing it over to HMRC.

The more sophisticated carousel version that lies at the heart of the escalating losses involves the repeated import and export of the goods through a series of contrived transactions.

In these cases the losses are realised when the HMRC pays the fraudsters the VAT refunds that are due when the goods are exported to other countries within the EU.

Already this year the ONS estimates that the amount of trade associated with the fraud has exceed 2005's levels, which in itself was a record at �11.5bn.

It led the then chairman of the HMRC, David Varney, to describe the fraud as "one of the most serious attacks on the tax system we have ever seen".

Big losses

On the face of it, the figure of �25.5bn in fraudulent imports and exports indicates that - at a standard rate of 17.5% - HMRC may have failed to collect �4.5bn worth of VAT.

However, this is a calculation that HMRC disputes.

Its own estimate of how much has been lost to the fraudsters will not be published until the chancellor Gordon Brown publishes his pre-budget report in November.

Last month the BBC's Panorama programme revealed estimates by Belgian tax experts that the UK had lost �8.4bn in revenue to VAT fraudsters between June 2005 and June 2006.

Faced with this sizable problem, the HMRC has been stepping up its efforts to clamp down on the fraud.

It has allocated hundreds more staff to check applications for VAT refunds, has tried to make it more difficult for traders to register for VAT, and has been logging the export of all mobile phones on a computer database.

From December, HMRC is also planning to change the way the VAT system applies to a variety of electronic goods to make it even harder for the tax to be stolen.