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Government to close Channel Islands VAT loophole

By | Published on Wednesday 9 November 2011

Houses Of Parliament

The VAT loophole that has enabled mail-order operations based in the Channel Islands to sell low-cost goods to customers back in the UK without paying the 20% sales tax is to be closed next spring after years of campaigning by independent retailers who can’t afford an offshore base.

As expected, the UK Treasury announced last night that the so called Low Value Consignment Relief would no longer apply to the Channel Islands from next April, meaning that the many mail-order operations based there – which includes most of the big mail-order CD and DVD sellers – will no longer have a 20% advantage over their mainland competitors.

As much previously reported, the tax break favoured the handful of companies which quickly spotted the benefits of being offshore as mail-order services began to boom in the internet age – such as and the Hut Group – and those bigger retailers who could subsequently afford to relocate or outsource their online CD and DVD operations to Jersey or Guernsey.

But for high street sellers and those independents looking to capitalise on the growth of mail-order but unable to go offshore it was a major hindrance, especially once the Channel Island etailers started to compete with each other on price, rather than using the tax break to boost profit margins, pushing the retail price for CDs down across the board. Ironically the big retail chains, including HMV, Woolworths and Zavvi, were among the biggest losers, despite most of them also relocating to the Islands once the benefits of the VAT relief became apparent.

The campaign by independent retailers to close the tax break, which is now costing the British tax payer an estimated £140 million a year, has had to cross many hurdles, with the previous Labour government and Channel Island leaders initially paying only lip service to the problem, and UK tax officials playing down the negative impact of the loophole. But when campaigners took their case to Europe alleging LVCR was in breach of European tax laws, and then put pressure put on the Tories, who had spoken out against the system in opposition, progress started to be made. Though it was only in recent months that it became apparent that progress would go so far as to close the loophole completely.

It remains to be seen what the impact of the end of LVCR really is. On the Channel Islands, where about 1000 people work for the offshore retailers, there will be almost immediate job losses, with some of the mail-order firms based there already talking about relocating to other tax beneficial territories such as Switzerland or Eastern Europe. Other companies whose mail-order operations are based in the English Channel – including HMV – are still considering their options post next April, but seem unlikely to stay on the Channel Islands long term without the tax break.

Back in the UK the change should help those mainland music retailers still in business, though whether it will bring about a revival of independent sellers – many of whom have gone out of business in the last ten years, in part because of the cost cutting of offshore competitors – remains to be seen.

In an interview with CMU last week, Richard Allen of campaigning group RAVAS, which has led the fight against the VAT loophole, said he hoped that a more level playing field in the online mail-order space might provide opportunities for independent retailers. He said: “The damage [of LVCR] was critical in 2008 and [the government] should have acted in 2005 or 2006. Instead the silence on the issue was deafening. But hopefully, with a level playing field in VAT, we shall now see some green shoots”.

Welcoming the government’s announcement on LVCR this morning, Allen added: “The removal of this major market distortion should be welcomed by all UK businesses that wish to trade online. The VAT loophole is not only contra to the basic principles of EU VAT law but is also contra to any sense of fair play and a ‘moral market’. Although we welcome competition based on price and service, a scheme that abuses tax legislation in order to promote damaging and predatory competitive behaviour should never have been allowed to develop”.

Noting that some online retailers may find other tax loopholes to exploit, he continued: “We hope that the UK government and EU will now remain vigilant and ready to close down any similar schemes should they develop in other locations. The Channel Islands VAT loophole has over many years destroyed livelihoods and caused much misery in the UK business community. We are of course sympathetic to those Channel Island employees who may lose their jobs as a result of the ending of this industry but we think it is entirely disingenuous for commentators to blame the loss of that employment on those attempting to correct what is clearly an unacceptable, unsustainable and damaging abuse of the tax system”.

You can read the full CMU interview with Allen exploring the history of LVCR tax relief and the campaign against it here.

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