Increased suspicions over VAT fraud have led to a 44 per cent rise in the number of VAT refunds that the tax authority has delayed returning to businesses in the last year, according to official figures.

The number of refunds delayed by HM Revenue & Customs rose last year for the first time in five years, in a sign of the growing threat of fraud in the wake of the VAT rate rise, according to Pinsent Masons, a law firm.

In the year to March 2012, 584 VAT claims were selected for HMRC’s “extended verification process”, in which refunds are delayed while fraud checks are made, up from 405 the year before.

Jason Collins, head of tax at Pinsent Masons, said there was a danger that “many legitimate companies will be caught up in this crackdown”.

The UK’s vulnerability to fraudsters exploiting weaknesses in the European VAT system may have been increased by the rise in the VAT rate to 20 per cent in January 2011, above that of France and Germany. But HMRC said its anti-fraud strategy has reduced estimated losses from VAT fraud from £3-4bn per year to £0.5-1bn since 2006.

It said: “HMRC carefully check VAT repayment claims where someone in the supply chain is associated with MTIC fraud, in order to safeguard taxpayers from incorrect repayments. Businesses that knew, or should have known, of a fraud connection are not entitled to repayment.

“Only a very small number of over 2 million claims we receive a year are subject to extended verification checks and the vast majority of businesses receive VAT repayments within days.”

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