The government's fight against multi-billion pound "carousel" fraud stepped up a gear yesterday as customs officers arrested 10 people after raids across Britain and Europe and said they had frozen dozens of bank accounts in Dubai. Revenue & Customs said the arrests followed a five-year investigation into a systematic attack on the VAT system which is thought to have cost the taxpayer a quarter of a billion pounds.

Ten men were being questioned in police stations in London last night after raids in south Wales, the West Midlands, Cheshire and Buckinghamshire. Four European warrants were issued for arrests in France and Spain.

Paymaster general Dawn Primarolo said yesterday that the government's efforts to contain the fraud had led to a "massive drop" in the attempted levels of fraud since their peak last summer. The amounts, she told a House of Lords committee, were now "minuscule" - something confirmed in official data.

In an operation with Dutch authorities last autumn, Revenue & Customs closed a bank in the Caribbean which turned out to have been used by all of Britain's estimated 2,500 carousel fraudsters. The First Curacao International Bank (FCIB) was owned by oil trader John Deuss, who was subsequently arrested by Dutch police and charged with money laundering and running a criminal organisation. With an increase in the number of VAT investigators, the government feels the FCIB closure dealt a hammer blow to the alleged fraud.Ms Primarolo told the Guardian the government's focus, now that the huge tax losses had been stemmed, was on recovering some of the billions stolen by organised crime gangs in recent years.

Much of the stolen tax ended up in Dubai, where accounts, related to those in FCIB, have been frozen while investigations continue. Under new laws, the government has sweeping powers to force financial institutions to reveal details of suspect transactions.

Carousel fraud occurs when someone imports small expensive items such as computer chips or mobile phones free of VAT, sells them on with the VAT added but pockets the VAT and disappears. The goods often pass through a chain of companies and are re-exported with the VAT reclaimed. They are then re-imported and spun round the so-called carousel again.

Tax losses spiralled out of control before the FCIB raids as ingenious fraudsters developed "virtual carousels" with computer programmes that did not need any goods to be actually traded. Customs officers admitted at that point they were losing "two Tonbridge robberies" worth of money, or ?100m every week. Losses have fallen by more than 90% since the FCIB raid.

Following a series of raids in July 2003 in which 42 people were arrested, Customs investigators have been examining more than half a million documents that were seized, along with the hard drives of 391 computers with a combined data capacity of 28 terabytes.

Euan Stewart, deputy director of criminal investigation at HMRC said carousel fraud was now the organisation's top priority. "The sophistication of the organised crime gangs behind these frauds means that our investigations are increasingly complex but we are committed to bringing the criminals behind it to justice and to recovering the money stolen from the British taxpayer, wherever in the world our investigations lead. This is not victimless crime, it's organised crime that causes real harm."

Revenue & Customs has carried out a string of raids and arrests in the past six months and succeeded in prosecuting far more fraudsters than it used to, thanks to improved knowledge among judges and juries of what the fraud involves. Sentences have got longer too.

Ms Primarolo denied reports that the Revenue's increased vigilance on VAT repayments was harming legitimate businesses. In the last nine months of 2006, she said, Revenue & Customs had received 284,000 applications for new VAT registrations by companies. It had rejected only 1,000 of those. "We are trying to strike a balance between protecting revenues and facilitating business activity. We have got that balance right."

She insisted HMRC was acting completely within UK and European law and was confident it would not lose lawsuits brought by firms claiming VAT reclaims had been wrongly withheld "These people trying to steal tax money are highly litigious. They have some of the best legal minds and best accountants."

Longer sentences

Sentences for carousel fraud have been rising sharply, reflecting increased awareness of the seriousness of the crime and the growing expertise of prosecutors. Big fraudsters who would once have escaped with light sentences now face jail terms in double figures. Last month saw the longest sentence yet: Emmanuel Hening, a mobile phone trader with dual Belgian-French nationality was jailed by Worcester crown court for 15 years for masterminding a ?54m fraud.His gang of eight got a total of 38.5 years.