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Government may close Channel Island VAT loophole

By | Published on Thursday 3 March 2011

Houses Of Parliament

The government has indicated that, at long last, it may move to close the loophole that allows mail-order operations based on the Channel Islands to sell CDs, DVDs and anything that retails for under £18 without paying any VAT.

As much previously reported, the loophole exists because of the Channel Islands’ slightly unusual status, inside the European customs zone but not part of the European Union. It means that any mail-order set-ups based there selling low price goods can undercut mainland-based shops and mail-order companies by 20% without affecting their profits.

All the big music sellers utilise the loophole, including Tesco, Asda, Sainsburys,, Amazon and HMV. But the option is not open to smaller retailers who can’t afford an offshore base, which, opponents of the VAT dodge say, has led to numerous independent music stores, who might otherwise have been able to respond to the new threat of the internet by entering the mail-order domain themselves, going out of business.

Arguably the loophole has also been damaging to HMV, even though the company’s mail-order operation uses it, because the music retail giant dominates on the high street and not online, but on the high street they are at a 20% disadvantage to its online-only rivals.

On a number of occasions the last Labour government indicated it would close the loophole, which also costs tax-payers millions a year, but then did nothing. The current government’s money man, Georgie Osborne, was openly critical of the VAT dodge while in opposition, but his team at the Treasury have been rather quiet on the issue since coming to power. Until yesterday.

As expected, Tory Lord Ralph Lucas raised the issue in the House Of Lords yesterday afternoon, asking the government to clarify the scale of the dodge. In response, the Treasury’s spokesman in the Lords, James Sassoon, told the House: “We are committed to tackling tax avoidance and, in that context, we hope to be in a position to announce possible changes to the operation of LVCR [low-value consignment relief – the name for this loophole] in the [next] budget”.

Any closure of the loophole will probably be most damaging to those mail-order-only companies who have built a business that specifically exploits the dodge, while the BBC estimates up to a thousand jobs could be at risk on the Channel Islands. For the bigger retailers, though, it won’t make much difference.

Tesco stressed yesterday that it had always passed the savings the VAT dodge allows onto its customers – so if and when the loophole closes, it just means CDs and DVDs on Tesco’s entertainment website will become 20% more expensive, but then so will CDs and DVDs on all their competitors’ sites, so Tesco won’t lose out.

Unless, of course, some of its competitors decide to start sourcing their CDs from outside the EU, ie from parts of the world where the wholesale price charged by record companies is a lot less. The record companies will fight any such move – as they did when CD Wow employed such an approach a few years back – but some fear that those companies who will lose most from any closure of the VAT loophole might consider that option anyway.

But for the independent retailers who have long opposed the Channel Islands VAT dodge, yesterday’s statement from Lord Sassoon was a welcome sign their campaigning against the loophole is finally having an effect.

Chris Gorman of The Forum Of Private Business told the Daily Mail: “It appears the government has finally seen sense on this. It has been hugely unfair having a tax loophole that could only be exploited by big multi-national businesses to the detriment of tiny little high street traders. We are very glad that government has finally recognised what a big issue this is. There has been a feeling among many small businesses, particularly record shops and others selling low value items, that they have been really unfairly treated”.