HM Revenue and Customs (HMRC) has arrested 15 men suspected of being key players in a massive VAT fraud, often using business banking as a cover, following a series of dawn raids across Europe.

The arrests are part of a crackdown on ‘carousel fraud’, a tax evasion scam that is estimated to have cost the Treasury around £2.5bn in 2005-06.

HMRC confirmed that 300 of its officers had taken part in the raids which covered the UK, France, Spain and Germany. Over 50 search warrants were executed in the UK alone. Further arrests are expected.

Euan Stewart, HMRC’s deputy director of criminal investigations, said: “The scale of the problem across Europe is unprecedented and HMRC has significantly strengthened its response to this serious fraud, often taking cover under the guise of business banking.”

HMRC’s action is believed to be connected to the closure of a Caribbean bank alleged to have been a clearing house for laundering the proceeds of ‘Missing trader intra-community’ (MTIC) fraud.

The fraud involves importing goods from other EU countries into the UK, which are VAT-free under current European law. The importer then sells them on in a chain of fraudulent transactions then re-exports them, claiming back VAT which was not paid in the first place.

In its more sophisticated forms, the fraud, hard to detect under its cover of legitimate business banking, involves goods like mobile phones that are sent on a merry-go-round of trades through different countries – hence the description ‘carousel’.