A breakdown of trade figures from the Central Statistics Office (CSO) indicates that up to 40 per cent - or some €3.5 billion - of the fall in exports during the first five months of the year was due to the ending of VAT fraud schemes, writes Cliff Taylor, Economics Editor

These schemes involved goods being imported into the Republic from Britain and then re-exported to Britain. This was part of a chain of transactions designed to allow the goods to be imported VAT free into Britain. They were then sold at the VAT-inclusive price.

This so-called "carousel" fraud sometimes involved multiple exporting and importing to build up a string of bogus VAT claims.

It is believed to have inflated imports from exports to Britain for a number of years up to 2002. A crackdown on the schemes last year appears to have closed many of them down, which has contributed to a massive fall in recorded trade between Britain and the Republic this year.

The main sector affected was electrical machinery, apparatus and appliances and parts, listed as Standard International Trade Classification (SITC) 77 in the trade data.

A breakdown of the latest figures, provided by the CSO following a request from The Irish Times, shows that exports in this category to Britain were €276 million in the first five months of 2003, a €3.982 billion drop from the €4.258 billion recorded in the same period last year.

A similar drop in imports from Britain in the same category adds weight to the conclusion that the vast bulk of the decline is due to the ending of the VAT scams.

The CSO figures show that imports from Britain in this category fell from €4.182 billion in the first five months of 2002 to €537 million in the same period this year - a drop of €3.645 billion. The table shows the monthly breakdown, with particularly significant falls in May.

There is no way of saying precisely how much the VAT schemes contributed. However, the huge fall in trade suggests up to €3.5 billion of the fall in exports and imports in the first five months of this year resulted from this. This would account for some 39 per cent of the total €9 billion fall in exports during the first five months of this year and some 50 per cent of the total fall in imports.

Because this affected both imports and exports, it is not expected to have had a major impact on the overall level of the trade surplus. The CSO has said in recent releases that "a very significant fall in the pattern of distributive-type trade in electrical machinery and parts with Great Britain" had a very large influence on year-on-year comparisons for exports and imports. However, it said that "the net balance of trade... is not significantly affected" and thus the distortion would not have a significant impact on overall growth figures for the economy.

The distortion does, however, affect the analysis of exports figures and trade patterns considerably.

If trade with Britain in the affected category is excluded from the trade figures for the first five months, it reduces the measured fall in total annual exports from 21 per cent to 13 per cent and cuts the decline in imports from 25 per cent to 13 per cent.

Earlier this year, the British authorities estimated that some €29 billion in trade had been involved in so-called "missing trader" schemes over the past four years, which peaked in 2002, although only a portion of this would have involved trade with the Republic.

The Revenue Commissioners has confirmed that it has assisted the British authorities in investigating such schemes.

The CSO trade figures are derived from figures supplied by the Revenue.