Government efforts to crack down on rising VAT fraud were backed by a European court ruling yesterday.
Judges at the European Court of Justice in Luxembourg supported a tax law change that makes traders potentially liable for the VAT scams of others in the same supply chain.
But they warned the Government had to prove first that the trader might reasonably have known someone else in the transaction was a wrong-un.
The condition prevents the exchequer operating a "strict liability" regime, under which just being part of the same supply link could make a trader automatically liable. Earlier this year the same court ruled against UK customs tactics in withholding VAT refunds even from legitimate traders as part of the battle to crack down on so-called "carousel fraud".
The decision removed a vital government weapon in countering such fiddles which cost the Treasury between #1.2 billion and #1.9 billion in 2004-5. Total missing VAT receipts over the last five years through carousel fraud are put at between #6.75 billion and #11 billion.
Nevertheless a Treasury spokesman welcomed the court ruling, and said a VAT fraud crackdown would continue.
"Traders that do not take reasonable precautions are at risk of being liable for unpaid VAT."
Carousel fraud involves traders claiming VAT rebates on goods on which they have not paid VAT in the first place.
Officially known as Missing Trader Intra Community fraud, the crimes exploit the fact t hat trading b etween EU member states is effectively VAT free.
Criminals buy high-value goods VAT-free in one EU market and then sell them on in another market at a price including VAT. The goods pass through several traders in a "carousel" of transactions which often involve totally innocent people in the chain.
Yesterday's case involved 53 traders in mobile telephones and computer processing units and their trade body, the Federation of Technological Industries, who appealed against new clauses in UK law making all parties involved in such transactions jointly liable for the missing VAT.
The issue was referred to the Luxembourg court, which ruled that the Government was entitled under European Union rules to make a person jointly liable for VAT payments owed by someone else in a supply chain - as long as the authorities applied "the principles of legal certainty and proportionality".
The ruling went on: "The national measures at issue provide that a taxable person other than the person who is liable can be made jointly liable to pay the VAT if, at the time of the supply to him, the former knew or had reasonable grounds to suspect that some or all of the VAT payable would go unpaid.
"A person is presumed to have reasonable grounds for suspecting that such is the case if the price payable by that person was less than the lowest price that might reasonably be expected to be payable for those goods on the market, or was less than the price payable on any previous supply of those goods.
"Such presumptions of guilt may not be formulated in such a way as to make it practically impossible or excessively difficult for the taxable person to rebut them with evidence to the contrary."