Home » VAT » Channel Island VAT Loophole Finally Closes

Channel Island VAT Loophole Finally Closes

RAVAS, welcomes the Coalition Government’s action to remove the European import relief that underpins the VAT avoidance arrangement known as ‘The VAT Loophole’. The Channel Islands mail order industry has been enjoying an unfair advantage for many years, an advantage reliant upon the avoidance of VAT that has been facilitated by the exploitation of an obscure European VAT import relief called Low Value Consignment Relief.

Following a successful RAVAS complaint to the European Commission, Chancellor George Osborne backed up the Coalition Governments’ commitment to end the Channel Island abuse of LVCR in the 2011 Budget. He announced an initial drop in the LVCR threshold from £18 to £15 as of November 1st this year and indicated that further discussions would take place with the EU so that LVCR “can no longer be exploited for a purpose for which it was not intended”. Those discussions led to the announcement today that LVCR from the Channel Islands will be scrapped completely as of the 1st of April 2012 in order to “bring increased fairness for UK businesses, benefit the UK economy and protect millions of pounds in tax revenue” .

LVCR exempts goods from VAT if their value falls below the LVCR threshold when they are imported into the UK from outside the EU and is intended to relieve the need for member states to collect small amounts of VAT when the cost of collection exceeds the amount due. The Channel Islands are close to the UK mainland yet are outside the EU for VAT purposes, however their location and VAT status were not considered as a potential source of VAT avoidance when the UK Government applied LVCR to Channel Island imports in 1983. As a result an industry has developed on the Islands which encourages the importation of UK and EU goods so they can be sold back into the UK by mail order, VAT free.

This significant trading advantage was initially exploited by the horticultural industry who import into the islands most of the flowers and plants that are exported to the UK by mail order. In the mid 1990’s ‘The VAT Loophole’ attracted other sectors including ink cartridges and contact lenses. It was however CD and DVD mail order which brought the avoidance scheme to public attention and the first decade of this century saw the rise of the VAT Free Channel Islands entertainment retailer, pioneered by Play.com.

This round tripping mail order industry in an unlikely location, whilst popular with consumers, has destroyed or damaged scores of viable job-creating businesses on the UK mainland. It has also generated vast amounts of unnecessary extra packaging and carbon dioxide and cost the taxpayer at least a billion pounds in lost VAT in the last decade.

In contrast to the offshore growth in online music mail order, UK mainland music retailers have been unable to take advantage and have been pushed out of the marketplace by the unassailable VAT advantage afforded those able to establish a Channel Island base.

The market distortion that has resulted has not only contributed to the loss of high street music retail brands including Fopp, Zavvi, MVC but has also destroyed hundreds of independent retailers, and wiped out virtually all mainland internet music retail. Over 90% of mail order music retail is now based offshore.

While some observers have claimed that the general fall in music sales and music downloads is responsible for the demise of UK retail the truth is that downloads remain peripheral to the albums market. In 2008, music retailers were closing at a rate three times faster than the fall in music sales. Conversely offshore ‘hard format’ CD retailers avoiding VAT were growing at rates greater than 100% year on year.

Similarly many other mail order sectors including memory cards and electronic goods, cosmetics, gifts, computer games and car spares have fallen under the spell of the VAT Loophole which has lured customers offshore at the expense of UK mainland retail both online and on the already struggling high street.

Richard Allen who has been campaigning on the issue since 2005, before joining RAVAS as their spokesperson in 2009, commented on the Government’s action: “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. 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 Island’s 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”

Tags: , , , , ,

19 Responses to Channel Island VAT Loophole Finally Closes

  1. RAVAS does not rejoice in anyone losing their job whether it be in the Channel Islands or on the UK mainland. This website and campaign were set up to remove what was clearly an unfair and unjustifiable arrangement that penalised UK business. All we ever wanted was a level playing field and fairness in the application of VAT in relation to goods sold to customers on the UK mainland. We will not be allowing any offensive or derogatory comments to be posted here and we shall also no longer be allowing debates about LVCR or fulfilment, as the issue has already been debated in great detail on this website over the last few years. If however you wish to show your support for our efforts please do!

  2. Excellent news. It should be now be a more predictable and equitable market.

    Well done to RAVAS for sticking to their beliefs and principles.

  3. Congratulations all; I would like to reiterate the official comment made by RAVAS in saying that I think I can speak for all of us when I say that this was only ever about levelling the playing field.

    I have seen far too many legitimate businesses in the UK lay off staff as they have been either gone bankrupt or have been forced to relocate. The situation was verging on the ridiculous and I personally think that it was reaching a breaking point. The UK couldn’t allow businesses to continue to either relocate or set up in the Channel Island with the sole intention of round tripping goods to undercut their mainland competitors.

    Things would have to cease sooner or later and the longer it was left, the greater the reliance the islands would have on the fulfilment sector. This would only increase the damage when it was eventually closed down.

    I hope that there are no sour grapes and that I can no compete fairly with my Channel Island based competitors on a level playing field. That’s all I ever wanted.

  4. “Another fine mess you’ve got me out of”. Good luck ya land-lubbers! Shiver-me-timbers, if it ain’t old Jack Sparrah, turned back from the mainland with his cargo of low value swag! The Contra’s banned forever! God save the King!

  5. No, we are not rejoicing in the possibility of anyone losing their jobs. You have to say that if these companies close down, then it just proves that the only reason they were there in the first place was tax avoidance. Personally, i am thinking just now of the hundreds of shops and thousands of workers who are no longer in work in the UK mainland because their shop has closed down, almost entirely because of these big company’s tax avoidance scams, I had to close down 3 shops and make 20 people redundant. I’ve kept Amazon’s message of sympathy on my wall.

  6. As a business that was only 2 years old and unable to make a dent in the online memorycard market, I am now preparing the site once again to re-launch as now it has a much better chance of competing. Let the roots of prosperity begin, how many people should I employ, lets ready the books to pay the VAT, Corp Tax and PAYE. Let the money flow back into the treasury coffers to spend on getting this damned county back on its feet.

  7. This is great news, finally retailers in the UK can now compete. Well done to everyone who helped in this campaign.

  8. Very well done, Richard. A grievous wrong righted better late than never. We must also thank the coalition government for seeing this abuse for what it is after 13 years inaction from Labour. We must be vigilant of course as this is not the only abuse going on but for now a job well done indeed.

  9. This is an excellent result for your hours of hard work. Congratulations and thanks for taking the time and trouble to make that difference. While feeling sympathy for any individual losing their job as a result of this decision, I do look forward to the many companies involved returning to a legitimate business model. By deploying their entrepreneurial skills and financial resources on new innovative methods of providing first class services to their core UK customers they will ultimately gain long term sustainable success.

  10. To Richard and all who have helped, a huge thank-you for your time and effort. We’ve only managed to keep our very modest online CD business going mostly thanks to the loyalty of long-standing customers (who contrary to much press do still want to purchase physical product), and explaining to them when they call up why we’re not able to match the off-shore based firms. It’ll be interesting to see what happens in the fall out from this, but as others have said ahead of me, it does at least give us a chance to win back more customers based on service rather than price. Now if we can just find a way to prevent Amazon and co. screwing such massive discounts out of suppliers…! Thanks again. Simon

  11. What will stop these companies from relocating their fulfilment operations to Switzerland or Hong Kong?

    Are we not just chasing the problem around the globe, or are there measures planned to stop the non-EU loophole from being exploited?

    • The complaint lodged with the EU by RAVAS was that the Channel Islands exploitation of LVCR was abusive and that LVCR was being used for VAT avoidance and evasion. The UK are obligated to prevent avoidance and evasion through the use of LVCR under the Principle VAT Directive and the Directive that gives member states of the EU the right to implement LVCR (it is an exemption from VAT governed by certain rules). If the same thing was to take place in other locations the UK would be obligated to prevent it there by adjusting the way the relief is applied exactly as they are doing with the Channel Islands. They have a number of measures open to them but in this case they opted to exclude mail order goods from the relief which they are legally entitled to do. HMRC can also take anti-avoidance measures against companies who set up offshore companies deliberately to avoid VAT.

  12. Congratulations on seeing this through to ensuring that there is level playing field for UK businesses!

  13. Finally some great news! This will enable us and many other companies to employ staff and grow their businesses for the good of the economy. Its been long overdue!

  14. Thank-you so much guys; it was getting genuinely tedious trying to run a business with one hand tied behind my back.

    Again, to reiterate, there’s no reason that these Channel Island companies can’t continue to prosper; they’ll just have to do it on a level playing field with the rest of us – No one can argue with that.

  15. As a Jersey resident I fully understand your campaign and the desire for a level playing field. A member of my family is employed in the industry in one of the locally owned entities and I believe that the sympathy many have expressed,as to job losses, is genuine particularly as so many in the UK have suffered. Thank you for that and perhaps we can still compete – I hope so.
    I would like to just make a couple of points :-
    1. There is much surprise here that this will only apply to the C.I.(I realise most comes from here but there is talk of Switzerland)
    2.At an individual level my mother in the UK is quite old and virtually housebound. I have from time to time sent small items (always below the previous threshold and given the true value on the customs declaration).Presumably VAT will apply in the future ?

    • We appreciate your understanding of this difficult situation which should never have been allowed to develop by the CI or the UK Governments. In answer to 1. see our comment above regarding other locations. In answer to 2. Personal Gifts are not affected by changes to LVCR and have always been covered by other customs rules.

  16. Presumably Switzerland and Hong Kong will be next in line? Guernsey/jersey were no doubt easier to relocate to owing to their proximity and postal arrangements.

    However… If its STILL cheaper to order in through HK etc, then I can see only those markets growing and it being much harder to shut down.

    The consumer wants cheap things first and foremost, only as an after thought do they realise the cost.. Whether that’s financial, employment or even humanitarian.

    FWIW , I live in Guernsey, I don’t work in fulfillment, I don’t agree with the exploitation by ANYONE, however I think we, as an island society, will be severely impacted by this. Perhaps in the strangest of ways – such as the price of food going up due to transport costs going up. It’s ‘normal’ islanders who may be affected, mainly because we have rather short sighted politicians 🙂

    I still think its probably the right decision – just perhaps could have been phased in and definitely should have been ALL countries, not just CI.

  17. The complaint lodged with the EU by RAVAS was that the Channel Islands exploitation of LVCR was abusive and that LVCR was being used for VAT avoidance and evasion. The UK are obligated to prevent avoidance and evasion through the use of LVCR under the Principle VAT Directive and the Directive that gives member states of the EU the right to implement LVCR (it is an exemption from VAT governed by certain rules). If the same thing was to take place in other locations the UK would be obligated to prevent it there by adjusting the way the relief is applied exactly as they are doing with the Channel Islands. They have a number of measures open to them but in this case they opted to exclude mail order goods from the relief which they are legally entitled to do. HMRC can also take anti-avoidance measures against companies who set up offshore companies deliberately to avoid VAT.