EU to step up legal battle with Britain over import scam

BRUSSELS (Reuters) - The European Commission is expected to step up a legal battle on Wednesday against Britain to recover 2.7 billion euros ($3.2 billion) in lost revenues due to an import scam, two European officials told Reuters on Tuesday.

Commission officials will send a second letter urging Britain to pay back the lost revenues, which follows a first letter sent in March, steps that could lead to a referral to the EU court of justice.

The move is considered "politically sensitive," a third official said, as it would come in the crucial phase of Britain's negotiations with its European Union partners over its departure from the bloc in March.

The Commission is seeking to recover customs duties that should have been collected on imports of Chinese footwear and textiles but were not, due to fraud. The scam caused losses to the EU budget, which is partly funded with customs duties. It could also have led to a loss of VAT revenue, EU officials said.

A British government spokesperson said: "The UK does not accept liability for the alleged losses or recognise the estimate of alleged duty evaded. We take customs fraud very seriously."

The move is part of a lengthy procedure that could eventually lead to financial sanctions, although the process usually takes years to complete and only in rare cases has ended with fines for states.

The EU has also said it will try to block what it sees as British moves to expand the list of services and goods exempted from Value Added Tax (VAT).

Under EU rules, member states can grant VAT exemptions only in exceptional circumstances. In contrast to other countries, Britain has a long list of VAT-free products and services because they were subject to a zero rate well before the EU rules entered into force.

($1 = 0.8550 euros)

(Reporting by Francesco Guarascio and Alastair Macdonald; Editing by Peter Graff)