Customs & Excise is being given draconian new powers to combat VAT fraud. Measures in the Finance Bill published last week threaten to hit legitimate traders - especially in the fraud-riddled computer chip and mobile phone industries - for VAT losses caused by the activities of criminals, reports The Independent.

These measures will allow Customs to impose liability for payment of lost VAT on suppliers or recipients of goods either side of a missing trader, even if they were not knowingly involved in the fraud.

Gordon Brown said in the Budget that he is looking to Richard Broadbent, the chairman of Customs, for £2bn a year extra VAT from tackling fraud by 2005.

"This is a desperate attempt to cover a black hole in the Treasury's finances," said Matthew Taylor, the Liberal Democrats' Treasury spokesman. "Their record of success in tackling the fraudsters has been terrible, so now they're targeting the innocent."

Don Mavin, a tax consultant of WJB Chiltern, said: "It reflects the fact that Customs are still not able to do their job by identifying missing traders and are therefore transferring the responsibility for the lost tax on to others in the trading chain."

Under Finance Bill 2003, Clause 18 Customs will also be able to deny rebates on VAT payments where the company has received an invalid tax invoice and cannot prove the bona fide nature of the transaction.

Hugh Love, tax director at PricewaterhouseCoopers and a former senior Customs officer, said: "Customs have been over-enthusiastic in their anti-avoidance operations lately. What I fear is, if they do not like a trader's response or it's a bit slow, they will use these new powers too broadly."

Customs has admitted that VAT scams, mostly involving mobile phones and computer chips, are now a bigger problem than alcohol and tobacco smuggling. It says the frauds cost £2.75bn a year - though the true cost could be up to £10bn. The total cost of VAT fraud in Europe is put at more than £50bn a year.

The swindle that has hit VAT receipts hardest relies on the European single market. No VAT is charged for trading between EU countries, and mobile phones and chips are ideal for trafficking because they are in high demand and easy to transport. Fraudsters use front companies to import goods VAT-free within the EU and then sell them on to other traders in the UK charging VAT at 17.5 per cent. The fraudsters pocket the VAT money and disappear.

The powers are in line with a voluntary European directive issued in 1977 but seen as draconian by previous UK governments. Customs sources told the IoS: "These sorts of losses would be unsustainable for many countries, including some fellow members of the European Community - some of whom, like the Netherlands, have similar legislation in place. It is a loophole that had to be closed."

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