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Channel Islanders’ bid to save LVCR fails

By | Published on Friday 16 March 2012


The High Court in London has dismissed a legal challenge by Jersey and Guernsey to the UK government’s plans to end the use of Low Value Consignment Relief on the Channel Islands.

As much previously reported, it is LVCR which means that mail-order set ups based in the English Channel, like those of and The Hut Group, can sell products priced under £15 back to the UK without charging VAT, giving them a 20% advantage over mainland-based businesses operating mail-order or high street enterprises.

Although the VAT dodge was employed in various sectors, its use was particularly prolific in entertainment retail, where start ups entered the mail-order CD and DVD market with a cost cutting strategy aided by the tax break. The bigger mainland operators, including HMV, subsequently relocated their mail-order operations to the Channel Islands, but smaller independent retailers couldn’t afford to, while a price war online forced prices to drop on the high street too, where 15-20% of the money charged had to be handed over to the VAT man.

The independent retailers campaigned for years about what they believed was an abuse of the tax relief system that was unfairly distorting the market, and making it impossible for independent retailers to compete in a marketplace where profit margins were already pretty tight. Both the last Labour government and political types on the Channel Islands paid lip service to the campaigners, but in the main did little, while the UK Inland Revenue turned a blind eye to the whole thing, and the offshore etailers stuck to the line that they were based on Jersey and Guernsey for the sea air not the competitive advantage the tax break delivered.

But the campaigners got more organised, formed a body called RAVAS, and proved the rampant use of the relief system was a breach of European tax rules. The coalition government pledged to act, and last year George Osborne announced he would withdraw the tax relief from Channel Island based companies. Most of those firms – based there for the sea air remember – suddenly decided a move to Switzerland sounded like a good idea. Also outside the EU (the criteria for benefiting from LVCR), the tax break would still apply there. And of course there’s all that nice mountain air.

Of course as mail-order businesses flee the Channel Islands once the tax break goes that puts a lot of local people out of work, which in part motivated Jersey and Guernsey’s legal efforts to force a u-turn. They argued Osborne’s move was discriminatory against the Channel Islands, and anyway wouldn’t benefit either mainland retailers in the UK or the British tax payer, because the offshore etailers would just move to other non-EU bases. Some in the UK – including HMV boss Simon Fox – have also expressed concerns Osborne’s decision to only block LVCR for the Channel Islands will just move the problem elsewhere.

However, RAVAS says those fears have been exaggerated. While it’s true some Channel Island mail-order companies are looking into other non-EU bases, the costs of relocating to, say, Switzerland are high, and having a base beyond the borders of the European Union poses all sorts of new logistical challenges, the big advantage of Jersey and Guernsey being their closeness to the UK, geographically, politically and commercially. And besides, if all the mail-order firms start using LVCR in another location, that will also amount to an abuse, and Osborne would arguably be obliged to shut off the tax relief there also. So a move to Switzerland could be a big upfront investment for short term benefit.

Either way, Judge John Mitting yesterday dismissed the Channel Islanders’ case, giving Osborne the all clear to end LVCR for Jersey and Guernsey from next month. The Islands may, of course, appeal, though that won’t stop the phasing out of the tax relief in the meantime. A spokesman for the government of Guernsey yesterday told reporters: “The various departments of the States Of Guernsey have been working hard to address the issues surrounding the removal of LVCR and further statements on this matter will be made once we have had an opportunity to examine this afternoon’s outcome in detail”.

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