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Lord to ask about Channel Island VAT dodge in parliament

By | Published on Friday 18 February 2011

Houses Of Parliament

Tory Lord Ralph Lucas plans to raise the issue of the much previously reported Channel Islands VAT-dodge in parliament on 1 Mar. He will ask the government to clarify just how big the mail-order industry that employs the slightly bizarre tax arrangement has become, and how much tax is lost to the government as a result of its existence.

As much previously reported, because of the unusual status of the Channel Islands, as ‘British crown dependencies’ but not members of the European Union, mail-order operations that base themselves there can benefit from a tax loophole that means they don’t have to charge VAT on products that sell for under £18. This means that online mail-order operations can undercut mainland-based music retailers – whether on the high street or the net – by a whole 20% without affecting their profit margins.

As a result, most of the big online CD and DVD mail-order websites either have a base on the Islands, or utilise a third party agency which is based there. Each year hundreds of thousands of CDs and DVDs are shipped out there in bulk by wholesalers in the UK, so they can be mailed back to Britain one by one in jiffy bags without any VAT being paid.

The tax dodge has proven controversial, partly because of the lost tax revenue, but mainly because of claims it has contributed to the demise of numerous UK-based independent music sellers. Even HMV is arguably suffering as a result of the VAT loophole, even though its own online operation utilises the dodge as well. But with rivals Amazon and dominating online, HMV’s core business – on the high street – struggles to compete being at a 20% disadvantage to the big net-based retailers.

Channel Island politicians, the last Labour government in the UK and the Tories before taking power have all pledged to close the loophole, though nothing has been done so far. Some of those who oppose the dodge say the British government actually has an obligation under European tax laws to close what is a “misuse” of the tax system, and have taken the UK to the European courts on the issue.

Treasury officials have been rather vague in the past regarding the extent of the VAT dodge party, so it’s hoped that Lucas’s parliamentary questions will force some clarity on that front. He has already filed two specific questions on the issue which are due to be answered in writing later this month. They are:

1. How many small packets and parcels were received by the Royal Mail from the Channel Islands in each of the last ten years for which records are available.

2. What was the value of (a) exports from the United Kingdom to the Channel Islands, and (b) imports from the Channel Islands to the United Kingdom, in each of the last ten years for which figures are available; and how much was imported and exported in each main category.

Despite this being a very long running story, there seems to be increased interest in it of late, perhaps because of a combination of the government’s public service cuts and HMV’s widely documented problems. Various recent media reports are listed at