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Economy in Brief

UK Trade Deficit Also Eases with Oil Prices; Heightened Law Enforcement Reduces "MTIC Fraud Trade"
by Carol Stone November 9, 2006

Easing oil prices also helped ease the trade deficit in the UK. It fell to £4.1 billion in September from £4.5 billion in August. The deficit on goods alone was £6.6 billion, down from £6.9 billion. Total exports of goods and services stood at £29.2 billion, actually down a bit from £29.3 billion in August. Imports fell more, to £33.3 billion from £33.8 billion. Excluding oil the balance was basically unchanged from August to September at -£6.1 billion. Thus, for now, erosion in the trade accounts due to the surging value of oil imports has been stopped.

However, the interesting story to us in this month's UK trade data is the report for the first time of the amount of VAT-evasion fraud in the data. The VAT rate in the UK is 17.5% on most goods. Some unscrupulous business people want to avoid paying this amount to Her Majesty's Treasury. Using the trading system and the VAT collection system itself, they not only avoid paying the tax, but also in some cases actually pocket the revenues for themselves.

These practices first came to light about six years ago and their impact on trade data started to get notice in 2003. Last year and now again this month, Her Majesty's Revenue and Customs (HMRC) have enhanced their enforcement efforts and identified larger quantities of misrouted trade. Initially, the practice was confined to EU trade, where cross-border transactions are largely unsupervised. Now, as HMRC has picked up the fraud more there, the perpetrators have moved to other countries, specifically Dubai and Switzerland, according to the ONS press release. Cell phones and computer components are apparently the most frequent items involved in these practices.

Traders import merchandise and then sell it on, either domestically or abroad. Then they "disappear" without making the required VAT payments. Thus, this scheme is called "Missing Trader Intra-Community [EU] fraud, known as MTIC. The "customers" may sometimes be their own business associates, who sell the goods again in order to pocket the VAT again. Then it is called a "carousel cycle". For most of the time since 1999, this has been small: at most £1 billion per month and usually £200-300 million. But over the last year, it has grown much more significantly, as seen in the table below. In Q1 and Q2 particularly, it amounted to £9.8 billion and £12.9 billion, respectively, accounting for nearly 16% and just over 19% of reported UK exports. The decline in exports in Q3 is almost totally absorbed by a reduction in the illegal MTIC trade, which was "only" £3.6 billion.

Probably data users who are well acquainted with the UK are aware of this issue, but others need to know. Most recently, it has greatly distorted both exports and imports and complicates interpretation of the data on them. For instance, the sharp drop in trade in Q3 could signal less rigor in the UK economy, but instead, evidently, it signals more rigorous law enforcement. The ONS is so concerned about the mixed signals in this information that its initial brief announcement of the September data consisted in more text about data reliability than about the figures themselves, much as this comment does. Note that we have highlighted the export side in our discussion, but imports are involved just as much.ONS introduced today quarterly data on the MTIC "fraud trade", along with current price and chained price series of exports and imports net of this phantom activity. Haver's database managers are preparing to enter these series in the UK database. Clients can watch Data News in the Client Area of Haver.com and in HaverSelect.com for their availability.

Monthly Averages
UK, Seas Adjusted Sept 2006 Aug 2006 July 2006 Year Ago
2005 2004 2003
Million £Trade Balance: Goods & Services -4,087 -4,544 -4,699 -4,205 -3,775 -2,915 -2,454
Balance on Goods -6,560 -6,856 -7,055 -6,033 -5,723 -5,074 -4,051
Exports of Goods 19,182 19,396 18,846 18,596 17,641 15,906 15,693
Imports of Goods 25,742 26,252 25,901 24,629 23,364 20,981 19,744
Goods Bal ex Oil -6,101 -6,134 -6,725 -5,315 -5,541 -5,149 -4,332
  Q3 2006 Q2 2006 Q1 2006 Q4 2005 Quarterly Averages
Billion £Reported Exports 57.4 67.1 62.7 56.4 52.9 47.7 47.1
MTIC Fraud 3.6 12.9 9.8 4.4 2.8 0.6 1.1
Exports Net of Fraud 53.8 54.1 52.9 52.0 50.1 47.0 46.0
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