Illicit wine sales could be as much as 11% of the market and may have lost HM Revenue & Customs as much as £700 million, a new report has revealed.

It is the first time HMRC has estimated the wine tax gap and trade bodies have welcomed the figures, saying they could help fight fraud and boost sales for legitimate retailers.

Overall the alcohol tax gap could be as high as £1.9 billion, with mid-point estimates at £350 million for wine, £120 million for spirits and £550 million for beer in 2011-12 – or £1 billion overall.

Losses have been falling steadily in beer and spirits since highs in 2007-8, but the new wine estimates showed rises and dips over the past few years.

Most wine fraud happens when criminals divert wine intended for sale in other European states into the UK market – and the Federation of Wholesale Distributors has said this has a devastating effect on legitimate wholesalers and retailers.

Chief executive James Bielby said: “Today’s figures confirm what our members have known for some time, which is that the supply of wine in the UK is out of control. Criminal operators have been allowed to set up and thrive in direct competition with law-abiding wholesalers. 

“By evading duty, criminals can sell wine at more than a pound a bottle below the best market price. Margins in the wholesale trade are slim and that differential is unfortunately very appealing to retailers who may not realise they are buying illegal stock.”

He added: “HMRC has previously said it cannot act on this issue without an official measure of the loss to the public purse. These new figures provide that measure, and we expect HMRC and the Border Force to take swift and effective action to put the rogue supply chain out of business, such as our proposal for a rigorous registration scheme for alcohol wholesalers.”

HMRC estimated the wine tax gap by taking total consumption from the government’s Living Costs & Food Survey and commercial research and subtracting legitimate consumption, based on returns to HMRC and the volumes of alcohol on which duty have been paid.