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Sainsbury’s joins the VAT dodge party

By | Published on Monday 22 November 2010

Sainsbury’s previously reported move into the mail-order CD space sees yet another online big-player music retailer exploiting a loop in the tax laws meaning it doesn’t have to charge VAT on any disk that costs less than £18, which is most of them.

As much much previously reported, if you base your mail-order operations on the Channel Islands, which are confusingly within the EU’s customs zone but not under the UK’s tax regime, you don’t have to charge VAT on low-cost products, even though you are selling them to British consumers.

It means that bigger mail-order operations which can afford off-shore facilities – including HMV, Amazon, and Tesco – can undercut high street retailers and smaller mainland-based mail-order sellers by 17.5% without losing any profit margin. And that advantage will increase even further when VAT is hiked up to 20% in the New Year.

It’s estimated the VAT dodge costs the British tax payer at least £110 million a year, and that’s before you consider the environmental implications of shipping CDs destined for UK music fans out to the Channel Islands only for them to be mailed back to the mainland one by one.

As previously reported, political leaders on the Channel Islands and the last UK government at different times criticised the loophole, though none of them did anything about it. Both Lib Dem Vince Cable and Tory boy George Osbourne have also previously criticised the VAT dodge, though the new government is also yet to act. Campaigners argue that UK tax authorities are actually obliged to close the loophole under European tax rules, and have therefore reported their failure to do so to the European Union’s tax commissioner, who is currently investigating the complaint.

Meanwhile the scale of the VAT dodging only increases. The Observer reported this weekend that Sainsbury’s has outsourced its recently launched entertainment mail-order service to Guernsey-based MBL Group, while Best Buy, the US retailer currently launching itself in the UK, will use Channel Islands-based The Hut for its online CD store. The Hut already sell CDs on behalf of Asda, Dixons, Argos and the Woolworths website, as well operating the online Zavvi operation.

Confusing legal technicalities for ethics, a spokesman for Sainsbury’s told The Observer: “Sainsbury’s new entertainment website is a perfectly legitimate and increasingly popular shopping option for our customers, who appreciate the convenience, choice and value offered online”.

Campaigners against the VAT loophole now have their own website at Amongst other things, they point out the money lost as a result of the loophole could probably pay for the school sports initiatives the government announced it would axe this weekend due to budget cuts.