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RAVAS chief admits online retailers are trying alternative ways to trade VAT-free, but reckons other loopholes will be closed

By | Published on Friday 23 November 2012

Richard Allen

The chief of the pressure group that successfully lobbied for the closure of the tax dodge for companies based on the Channel Islands says he is aware of a number of other methods being considered by etailers to maintain their VAT-free businesses, but that he’s confident all alternative loopholes will be ultimately closed.

This follows the report earlier this week that online retail firm The Hut had started using a warehouse in Chicago in a bid to still benefit from the so called Low Value Consignment Relief.

As much previously reported, LVCR means that VAT is not payable on low-value products imported into the European Union, so if an online seller bases itself outside the EU and sells low-value goods like CDs and DVDs into the UK, it can do so without charging VAT, giving it a 20% advantage over mainland high street or mail-order retailers.

Many independent retailers argue that the exploitation of LVCR by a small number of big mail-order firms, plus HMV and the supermarkets, helped contribute to the demise of many indie record sellers, who couldn’t compete on the high street, or transform their brands into successful mail-order businesses, because their offshore competitors had such a big advantage.

The vast majority of LVCR exploitation occurred on the Channel Islands, which was a perfect base to exercise the tax dodge for two reasons.

First, the mail-order sites need CDs and DVDs that originate in the UK because that’s what customers want, and the music and movie companies get pissed off if etailers source content from non-UK distributors. This means stock has to be shipped out to the offshore base and then mailed back to the UK. The geographic position of the Channel Islands made this so called circular shipping viable.

Second, through a whim of history the Channel Islands are not in the EU, but are within the European Union customs zone, meaning goods can move between the islands and the UK without all the cost and hassle usually associated with customs and duties and such like.

Until earlier this year use of the VAT dodge in the Channel Islands was rampant, but various campaign groups, and most notably RAVAS, demonstrated to the UK government – which had for years expressed concerns about the dodge but did nothing about it – that under European tax law it had a duty to stop abuse of the tax relief system. To that end Chancellor Of The Exchequer George Osborne closed the loophole to Channel Island-based businesses.

Many predicted that those operations using a Channel Island base to capitalise on LVCR would look to relocate to other sites just outside the EU – Switzerland and Gibraltar were referenced – where the VAT dodge would still apply. Though the further you get from the UK, and once you are outside the European customs zone, things get much more complicated.

“One way to circumvent the costs and delays caused by going through customs is to operate what they call a ‘bonded warehouse’ outside the EU”, RAVAS chief Richard Allen told CMU. “This enables a company to temporarily store goods in another country without those goods going through customs, and incurring duties. It’s very possible this is what The Hut is doing in Chicago. But I personally believe that, because such facilities sit outside the customs system of the host countries, LVCR should not apply when goods are imported back to the UK. A bonded warehouse clearly does not qualify as a third country within the intent of EU directives”.

Outlining another scheme being used by some of those affected by Osborne’s LVCR rule change, Allen continues: “We are also aware of a number of Channel Island retailers sending goods to the UK via Belgium, claiming LVCR when the goods enter the EU in Belgium. But this is definitely contrary to EU directives, as LVCR can only be claimed if the country of final importation – or the product’s destination – is the point of entry into the EU. Because Belgian law is not currently complaint with EU Directives it’s possible to claim LVCR in Belgium even if your customer is in the UK, but this is a matter that can be easily be resolved by action from the European Commission”.

While the UK government for years publicly criticised exploitation of LVCR in the Channel Islands but did nothing about it, Allen says he is now confident that Osborne will act to ultimately stop companies from finding new ways of exploiting the tax relief system to gain a competitive advantage in the CD and DVD market.

Allen: “George Osborne made a very clear political statement that LVCR use to trade VAT free in the UK and EU was a scam and that he would end it. I have no reason to believe from the correspondence I have had from him, and from [Treasury minister] David Gauke, that there is any unwillingness to deal with this issue. The major problem is dealing with the indirect imports via other EU member states and I have had assurances from HMRC that this is being looked at both in the UK and at The European Commission. RAVAS will be raising the issue with the Commission, and HMRC have already issued a notice stating that they intend to pursue a policy of ending LVCR on goods that arrive in the UK from outside the EU that are bound for other member states”.

While the more persistent VAT-free etailers may find other ways to continue exploiting the dodge as any new loopholes are closed, Allen says he is confident that it will become ever harder for offshore online retailers to work the system for competitive advantage over mainland operators. He concludes: “The entire EU VAT system will be changing to one where VAT is charged at the rate applicable to where your customer is based. This is due to happen with all digital services on 1 Jan 2015. I understand from the European Commission that the plan is to roll the same system out to physical imports so that all retailers, even non-EU ones, will have to charge/pay VAT. This will completely remove any need for LVCR”.

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