By Georgie Keate

Up to £1.2 billion is lost by HM Revenue & Customs (HMRC) in alcohol fraud each year, according to a scathing report by senior MPs.

The public accounts committee (PAC) argued the department has failed to prosecute smugglers who dodged taxes on alcohol because it was "seriously hampered by a lack of information".

"Alcohol fraud is big business. The department does not, however, have enough reliable information on the returns from tackling different types of alcohol duty evasion," said Richard Bacon, a PAC member.

"It cannot say, therefore, whether a more effective targeting of its resources might not secure a better return on its investment."

The report called HMRC "reluctant" to crack down on criminals after it discovered that on average only six successful prosecutions were made a year.

"This sends the wrong message to perpetrators and the wider public about the department's commitment to reducing alcohol duty evasion. It should give more weight to the deterrent impact of pursuing perpetrators through the courts," Bacon argued.

However, HMRC's chief executive Lin Horner said: "HMRC's performance in tackling alcohol fraud is measured by the combined impact of both civil and criminal proceedings on alcohol duty evasion – which increased significantly when the strategy was introduced."

"Prosecutions are a strong deterrent and HMRC continues to investigate cases criminally where this will maximise impact on the fraud."

The department plans to spend £917 million on tackling the problem while at the same time not having any idea what the tax gap is on wine imports, the report claimed.

It is thought that fraud is principally operated by exporting alcohol with unpaid duty to the continent and the redirecting it back onto UK markets.

"Since the criminal gangs who perpetrate major alcohol duty fraud operate across national boundaries, the department needs to strengthen its intelligence by developing better links with the industry, the UK Border Force and other EU member states," Bacon added.

The report also suggested introducing fiscal stamps on beer, a method that has seen some success in reducing tax evasion on spirits and improving its use of technology to track smugglers.