Tougher penalties should be considered to deter the "staggering" £11 billion a year lost in VAT fraud, the Commons public accounts committee has said.

A report published on Thursday also saw the MPs call on HM Customs and Excise to improve its ability to estimate the amount being lost to the public purse.

In 2002/03 there were net VAT receipts of some £64 billion.

But problems including inadvertent error, the deliberate understating of VAT liabilities or "systematic attacks on the VAT system" frequently result in traders not paying the correct amount of VAT.

Estimates suggest that between £2.5 billion and £4 billion a year is lost through such non-compliance by traders.

"Customs should conduct a pilot investigation, drawing on the experience of the Department for Work and Pensions, to produce broad estimates of fraud and error to help judge the balance between education and advice to remedy genuine errors, and investigations and sanctions for serious abuse," said the report.

Better use of data matching with the Inland Revenue is needed to detect traders who are evading VAT by operating in the shadow economy, added the MPs.

They also said that the number of investigations resulting in civil evasion penalties has fallen to around 270 cases.

In cases of under-declaration of VAT where there is no formal investigation of the trader, the maximum penalty is 15 per cent of the amount mis-declared.

But Customs should analyse the level of repeat offending by traders to consider whether the number and level of penalties for under-declarations and for civil evasion should be raised to create a greater deterrent, recommended the report.

"A staggering £11 billion of VAT is being pocketed by fraudsters and cheats, as well as those making genuine errors, rather than being collected for the public purse," said committee chairman Edward Leigh.

"Traders paying over the correct VAT, and the taxpayer in general, will want to see Customs step up its efforts to tackle these losses.

"In particular, I urge Customs to consider tougher penalties for evasion and under declaring VAT, as a greater deterrent.

"Customs also needs to take advantage of the merger with the Inland Revenue to improve data matching in order to identify traders in the shadow economy."