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Obsorne to explore limiting Channel Islands mail-order VAT dodge

By | Published on Thursday 24 March 2011

Houses of Parliament

So, as expected, the boy Osborne set aside a little bit of his big budget speech yesterday to explain what his government plans to do about the weird Channel Islands VAT tax dodge which lets offshore mail-order websites undercut their mainland competitors by 20%. And what does he plan to do? Well, slightly less than fuck all. But only just.

As much previously reported, because the Channel Islands are in the European customs zone but outside the EU, businesses based there benefit from so called Low Value Consignment Relief, which means that any products sold to customers in the UK under £18 are not subject to VAT.

This VAT dodge has been utilised by numerous large-scale companies – including Tesco, Sainsburys, Amazon, and HMV – to sell products like CDs and DVDs by mail-order without having to pay a sales tax. This gives these services a 20% advantage over high street retailers, and any independent music sellers looking to launch mail-order services.

Campaigners have been calling for the loophole to be closed for years, with some arguing the UK government actually has a duty under EU tax laws to ensure tax relief initiatives of this kind are not used to unfairly distort the market.

Both the Channel Island governments and the last Labour government in the UK pledged to look into the loophole, though they subsequently did very little to close it. George Osborne, meanwhile, criticised the VAT dodge while in opposition, and since becoming Chancellor Of The Exchequer his colleagues in the Treasury have promised they’d announce measures to combat it.

Those measures came yesterday. The main move is to reduce the threshold for the tax relief from £18 to £15, which may affect some niche operators but will mean next to nothing to CD and DVD sellers utilising the VAT dodge, given nearly all their products retail for considerably less than £15.

Osborne also pledged to “explore options” with the European Commission for limiting the scope of the relief, and vowed that if these measures are not effective that the issue will be revisited in a year’s time.

The most positive bit of Osborne’s announcement for those who oppose the loophole, I suppose, is the “exploring options with EC tax officials” bit, though that is, of course, a very vague commitment. Richard Allen of RAVAS, which lobbies on this issue, nevertheless welcomed that measure, though called on Osborne to instigate any explorations quickly, with a view to addressing the “scope” of the tax relief as soon as possible.

Allen told CMU: “We have been telling Revenue & Customs about this for years already. I hope they now come to a conclusion quickly about what they are going to do about it. Many UK retailers might not survive another year of this. [Reducing the relief threshold] isn’t really going to provide much immediate relief for those retailers suffering the daily reality of a distorted internet retail market”.

Though, he added: “They certainly won’t be opening bottles of champagne in the offshore fulfilment industry either, as it appears the days of this arrangement are numbered. We maintain a strong dialogue with the European Commission on this issue and we will be monitoring developments closely. There remains a significant amount of avoidance and market distortion caused by the UKs application of LVCR and its failure to prevent it being abused”.