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Channel Islands to challenge VAT loophole move in courts this week

By | Published on Monday 12 March 2012


The long running campaign to close the VAT loophole that gave mail-order CD sellers based on the Channel Islands an unfair advantage over mainland retailers is facing its final hurdle this week, as legal reps for Jersey and Guernsey try to fight the government’s plan to end the tax arrangement next month through the courts.

As much, much, much, much previously reported, so called Low Value Consignment Relief meant that companies could sell products under £18 (or more recently £15) by mail-order from outside the EU into the UK without charging Value Added Tax. The tax dodge was originally set up because the quantity of such sales was so low, and the cost of administering the collection of the VAT was relatively high, meaning the tax man would likely end off losing money overall.

But as the mail-order industry came of age in the late 1990s, aided by the rise of the web, some companies spotted that if they based online stores selling low-cost goods offshore they could use the tax relief system to gain competitive advantage, because they could sell their products 15-20% cheaper without affecting their profit margins. To achieve this they needed an offshore location that was logistically convenient for the UK, and the Channel Islands fitted the bill.

The likes of led the way, but others followed, including the big boys of UK entertainment retail who also based their operations in Jersey and Guernsey to compete with the newcomers to the mail-order market. Which was good news for all those guys, but left the independent retailers who couldn’t afford a Channel Islands base at a major disadvantage, and many reckon the VAT dodge contributed to the collapse of the independent entertainment retail sector.

As the independent retailers started to complain, both the British government and politicians on the Channel Islands promised to do something about the increased use of the tax break, but did little, and subsequently played down its impact. Meanwhile the UK Inland Revenue washed its hands of the problem, and those Jersey and Guernsey located companies benefiting insisted they were based in the middle of the English Channel because they liked the sea breeze.

But those campaigning against the VAT dodge got more organised – forming the campaigning body RAVAS – and discovered the rampant use of LVCR breached European tax laws. The current coalition government then pledged to act, and last year announced that the relief system would be axed for the Channel Islands next month. The announcement caused many of those companies whose mail-order operations are based on Jersey or Guernsey to privately or publicly plan a move, either onto the UK mainland where logistical overheads are cheaper, or into other nearby non-EU countries where the tax relief will still apply (possibly Switzerland).

The latter point – that LVCR is only being removed from the Channel Islands – will be key to the arguments presented by reps for the Jersey and Guernsey governments in the London courts this week. They will claim the UK government’s move on this issue is illegal and discriminatory, and that it won’t help UK retailers or increase British tax revenues because the mail-order businesses currently on the Channel Islands will move to other countries outside the EU. They will also claim that the move will result in a 50%+ increase in unemployment on the islands.

Of course the fact that so many mail-order firms who previously insisted they weren’t based on the Channel Islands for tax reasons are now leaving proves that they were specifically set up there to exploit the tax break. While the fact that Channel Island political chiefs previously played down the significance of the VAT dodge industry there, but are now predicting doom and gloom if it departs, damages the Islands’ credibility somewhat. RAVAS campaigners, meanwhile, have pointed out that some key political players on the Channel Islands have personal interests in companies related to the tax dodging mail-order industry.

Those campaigners also hope that the ruling in this court case will set a precedent that would allow LVCR to be withdrawn from any other countries where its use is widely used by mail-order companies selling primarily into the UK, thus deterring etc to relocate to such places, and countering those who say that the closure of the Channel Islands loophole is simply going to move the problem elsewhere. RAVAS will take an active role in this week’s judicial review, which is also likely to result in criticism of the UK’s Inland Revenue over its past inaction on this issue, despite the government tax collector fighting to save the loophole closure in this week’s court battle.

Confirming that RAVAS will make a submission to the hearing, the group’s spokesman Richard Allen told CMU: “Although we had effectively ended our campaign it was clear that powerful commercial interests were involved in the Channel Islands challenge to the UK’s LVCR legislation. We felt that we could not remain silent if those commercial interests were going to be closely involved with the move. The LVCR trade is a complex area of law and commerce, and clearly HMRC need assistance from businesses that not only understand how it works but whom also understand at first hand the insidious distortionary effects of this VAT abuse. The long term and blatant abuse has destroyed many UK businesses that other than for the lack of a 20% trading advantage would have been viable healthy operations giving people jobs and generating tax revenue in the UK”.

He continued: “Whilst we of course have sympathy for the effect on employment in the Channel Islands that the closure of this industry will have, it is for the people of the Islands to strongly question their elected representatives as to how they could possibly allow an industry that was based on the abuse of tax to become so important to the Islands’ economy. Not only did a report commissioned by the Jersey Government in 2005 outline that LVCR was the only reason that the fulfilment industry existed on the Islands but it also warned that the tax exemption that was being exploited was controlled by the UK and could be removed at any time. Now companies are closing up shop they cannot claim their trade was not entirely reliant on LVCR”.