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”