The government has escalated its fight against VAT fraud and successfully convicted four men over a £10m carousel fraud.

The men were convicted after the court heard that, between July and October 2003, HMRC paid Virgini VAT repayments of £7m through false VAT returns. Repayments were based on purchases of mobile phones that were allegedly exported by the company to the Ukraine. The total VAT claimed by Virgini during the three months was £10m (CRN, 6 November).

Individual convictions are reassuring to the public and as Debbie Hayman, assistant chief investigation officer at HM Revenue and Customs (HMRC), said in a statement: “This sends out a clear message to those involved that we are committed to tackling VAT fraud.”

However, a more overarching approach may prove more successful in blocking the carousel process before it starts.

Such an approach will get a boost in December, with the introduction of a Reverse Charge mechanism for the goods often involved in the fraud – mobile phones, hand-held computers and other electronic components.

The reverse charge means that the responsibility for accounting for VAT on goods will rest with the buyer (VAT on the purchase, not on the sale). This should avoid the seller disappearing without accounting for it to HMRC.

It is likely that, by identifying specific items that will be liable to the reverse charge, the fraudsters will find a new range of goods to trade in.

But this move demonstrates how serious HMRC is. In any case, this positive step should make a real difference to the amount of VAT leaking from the system. It may also relieve the pressure many innocent businesses face as a consequence of HMRC’s clamping down.

Currently, businesses wishing to register for VAT are facing a wait of up to three months before they obtain their VAT number. This leads to increased set up costs, to delayed VAT repayment on expenses and places businesses in limbo.

Firms are also suffering cash flow problems through the long delays in obtaining refunds of their VAT repayment claims. Also, businesses feel harassed when they are not even informed of which of their transactions is under scrutiny

Businesses will need to think about the impact of the changes to trading methods and IT systems. Even those not involved in the trading of electrical goods may need to apply the Reverse Charge as the range of goods affected increases.

For example, retailers selling to a mixture of business and private customers will need to differentiate at point of sale on the price charged and deal with the paperwork accordingly.

In order to assist businesses through the red tape, a helpful step would be clearer guidance from HMRC on the increased scrutiny firms are facing.

By helping legitimate businesses to comply, HMRC can make sure it avoids unnecessary investigations and identifies fraudsters more easily.

Software vendor Access Accounting recently became one of the first software vendors to embrace proposed tax collection changes in the UK by announcing its intention to release a Reverse Charge software application (CRN, 30 October).

The reverse charge was introduced to stop VAT fraud in gold trading. It is a step in the right direction, but the problem is that, whatever legislation is introduced, criminals will continue to find ways to dodge the law.