Roderick Stone of HMRC explained the operation to a jury at the High Court in Edinburgh on the second day of the trial of Dundee businessman Shahid Ramzan, 40, of Broughty Ferry.
Mr Stone said the trick is that an importer sells on goods charging VAT but not actually paying it. Eventually the goods, after passing though the hands of several companies, are exported again. The exporter then claims back, and receives, a VAT refund from what appears to be a genuine transaction.
But because the refunded VAT hasn't been handed over in the first place, HMRC makes a loss. As the same commodities can go round and round from importer to export broker and back again, the scheme is known as a carousel fraud, said Mr Stone.
Ramzan denies a charge brought under the Proceeds of Crime Act alleging that he took steps to hide, transfer or remove from Scotland a total of almost £115 million. He is also accused of cheating the tax man out of about £6m, which he also denies.
The trial continues.