Clothes and shoes were imported through the UK at fictitiously low values for years to avoid duties, the European Anti-Fraud Office (Olaf) has found.
As a result, investigators say the EU budget has lost millions of pounds in customs duties.
HMRC said it plans to challenge Olaf's claims about lost revenues.
The Olaf investigation found the UK to be a "significant hub" for so-called undervaluation fraud - where importers can profit from evading customs duties and related taxes.
Organised crime groups are using fake invoices to undervalue goods being imported from China - many of which are destined for the black market in other parts of the EU, investigators found.
They say the fraud has cost the EU £1.7bn in lost duties between 2013-16 and now they want the European Commission to recover the money from the UK.
In 2016, according to Olaf, 79.2% of the €817.2m (£709m) losses in customs duties for the EU budget were through UK importation.
Olaf have said the losses to the EU budget are on-going, as this fraud is still happening. Investigators warned HM Revenue and Customs a number of times but they failed to take tough action to curb the problem, it said.
A spokesman said: "Olaf has repeatedly drawn the attention of the UK customs authorities (HMRC) over the last years to the scale of the phenomenon and to the on-going revenue losses.
"As far as Olaf is aware, the UK authorities have not introduced risk profiles and the measures that they have taken do not appear to have curbed this traffic.
"To date, they have not initiated any criminal investigations in relation to these frauds."
He went on to say that it is the taxpayers who "pick up the tab" to compensate for the revenue losses.
But a spokesman for HMRC said: "This is not a bill, it is Olaf's estimate of evaded duty, and not one that is recognised by our experts who will be challenging Olaf on their calculations.
"HMRC has a very strong track record for tackling fraud and rule breaking of all kinds, securing more than £26.6bn last year alone and no one should be in any doubt that we are responding to the threat of fraud.
He added that HMRC is currently handling more than 550 cases relating to potential import fraud.