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Excuses for the Exploitation of LVCR

We receive a fair few emails putting forward arguments and excuses that support the ongoing exploitation of LVCR and we thought we’d share them with you.  Below you’ll find a list of the most common ones put forward to keep things exactly the way they are :

If you have any views on these arguments/excuses (either for or against)  or any new arguments/excuses please let us know by clicking here and filling in the form mail.

YOU CAN’T STOP CHANNEL ISLAND LVCR EXPLOITATION BECAUSE…..

1) Its good for the consumer We wouldn’t deny that fair competition and a good deal is always good for the consumer. It’s no surprise that avoiding a tax is also regarded as good for the consumer but there are a number of negative repercussions that result from a consumer advantage based on what we believe is an the abuse of a tax. In the case of the avoidance of VAT via LVCR the most immediate effect is that those UK residents who don’t buy CDs and DVDs VAT free are effectively sponsoring those who do,  through the loss of VAT revenue. I’m sure most UK tax payers wouldn’t be happy with that fact and certainly the Channel Islands economies don’t suffer any similar tax loss for the profits they make from LVCR exploitation. In the end, it’ not nice to have to pay any tax on anything – so are we going to abolish VAT? – if not, and if tax is levied at all, then why should consumers of one product get special treatment?  Additionally if you don’t have a credit card or access to the internet you don’t get the opportunity to buy VAT free at all. However it’s the longer term effects that are more insidious.  In the last few years many hundreds of independent UK retailers who promoted new music to customers through their expertise, passion and product knowledge have gone out of business. A huge network of independent music retailers that evolved over decades is what made the UK music market special and unique.   Whilst they were still trading the offshore retailers were  relying on this network to promote products that they then sold cheaper, VAT free. Offshore retailers essentially stole the sales from those promoting new music. Now many independents are gone we are left with large faceless corporate websites that don’t promote anything other than the homogeneous mass market mainstream. That’s definitely not good for the consumer (unless X Factor is your bag).  Neither is the fact that a small group of large companies now dominate music retail. That’s not good for competition. With the network of independent retailers gone there is now no network of music loving enthusiasts to champion new experimental artists who in their early years, have always been supported by this sector. That is bad for independent record labels which then impacts on artists, publishers and everything connected to selling music. On an even more basic level not everyone has a credit card. With no record shops and no credit card you have no choice. And that’s just the music industry. Other products have similar infrastructures that are affected.  But most importantly if tax revenue and jobs are being lost on the UK mainland then that’s bad for the UK economy. Just ask someone who has lost their job as a result of  VAT free competition and they’ll tell you that they won’t be consuming anything much for a while. Its a bit like arguing that cannibalism is good for the meat eater. Not if you are eaten it isn’t.

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2) It’s too expensive for HMRC to collect the VAT.

We’d question why VAT is so ‘expensive to collect’ when its the most profitable service on the planet and individual businesses have to carry the cost of the accounting admin.  It’s not as if there are any manufacturing costs and certainly HMRC don’t operate a very friendly ‘faulty returns’ policy!  But in any case we believe this argument is a total red herring. RAVAS has verified figures to show that in 2005 the loss of VAT from LVCR due to the largest online retailer in Jersey was virtually all of the LVCR lost from the Island. That lost VAT was in large part lost on goods that would have otherwise attracted VAT if they had been sold in the UK. Additionally 75% of VAT lost through LVCR in 2006 was due to The Channel Islands. Prior to LVCR exploitation the majority of goods benefiting from the relief originated from outside the EU, and not from within the UK/EU so the volumes of lost VAT were tiny. Post LVCR erxploitation with the circular shipping of UK/EU products to The Channel Islands and back,  both non EU/UK and EU/UK originating goods have become VAT free hugely increasing the amount of VAT lost. The volume of goods being ‘circular shipped’ is increasing. For the UK Government to argue that ‘doing nothing’ saves VAT is utter nonsense. There are alternatives. For instance Amazon USA has started charging UK import VAT and duty as part of the end price on goods ordered over the internet from the UK. It is the introduction of that kind of ‘pre-paid’  arrangement that stops VAT loss, not the maintenance of LVCR Abuse, indeed similar arrangements already exist in the Channel Islands where VAT is paid in advance by the retailer to HMRC on non-LVCR goods.

Therefore :

i)    There would be no cost of collection because the whole trade would cease if you took proper measures to collect VAT. The only reason this trade exists is to avoid VAT and there is no economic reason to operate from the Channel Islands if all your customers are on the UK mainland and if VAT is payable.

ii)    Even if the above were not true, the pre-paid VAT schemes operating in The Channel Islands could be used in Jersey and Guernsey to collect VAT at no cost to HMRC from goods sold by companies that wished to remain on the Islands.

iii)    Arguing about the cost of collection is legally irrelevant to the UKs obligation to prevent evasion, avoidance, or abuse!

iv)    If you use the argument that it would cost money to collect VAT, then you can’t also argue that retailers would move to Switzerland (or some other non-EU location). Either it costs HMRC to collect VAT on postal imports, or retailers go to Switzerland. NOT BOTH!

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3) It is inconvenient for consumers to have to pay VAT on imports by mail.

A strange logic that would seem to call for the abolition of VAT. If VAT is levied at all then it should be levied equally to consumers and producers of all non-necessity goods, in accordance with the principle of fiscal neutrality set out in the preamble to the Sixth VAT Directive. By the way I’m sure we’d all agree that income tax is pretty inconvenient as well, the fact it pays for the maintenance of our society is a minor issue.

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4) All the retailers on the Channel Islands would move to Switzerland if routing goods via the Channel Islands was stopped.

The main reason that the Channel Islands works as a location for exploiting LVCR is because it’s in the UK Sales Territory. In fact, record companies and purveyors of other UK licenced product would not readily supply a sales territory outside of the UK, and moving goods through Switzerland is logistically more expensive and incurs some Swiss import tax. For a number of reasons The Channel Islands are the most convenient place from which to conduct LVCR abuse, a fact not lost on the Jersey Post Office who advertised their LVCR abusing fulfilment service widely on the www.jerseypostlogistics.com website (it’s been removed because it was obviously highly incriminating but you can still find it archived here http://web.archive.org/web/*/http://jerseypostlogistics.com) .  In any case circular shipping from Switzerland would also still be, in our view,  an abuse.

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5)    The Reduction of the LVCR threshold would not have an impact now that the price of many CDs and DVDs and other products is below the threshold.

Not true. It would significantly affect the margins of companies involved in the LVCR trade as higher margins are made on the more expensive items, and in any case circular shipping goods of any value is still, in our view,  abusive.

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6)    LVCR exploitation is not the reason UK retailers are going out of business. The general demise of the high street and its replacement by online retail, and the emergence of digital downloads to replace physical sales, are more dominant factors.

LVCR exploitation has put online retailers out of business on the UK mainland, not just shops. In any case most shops also operate websites as well and are not ignorant of the benefit of the digital economy. The fact is however that UK mainland based Internet operations are unable to compete because they also have to charge VAT on their products so the digital economy in the UK is very much affected by LVCR exploitation.   The disappearance of independent UK music retailers far outstrips any movement from high street to online. Between 2005 and 2009 CD sales online were up by 40% and DVD sales online were up 209% yet independent retailers fell by 63% most of whom had online retail operations. It is now impossible to run a CD and DVD mail order operation on the UK mainland as profit margins on these products offshore are within the VAT advantage creating a barrier to market entry for small UK retailers. Only the large retailers can afford the costs of setting up offshore. As for the influence of downloads it is common knowledge in the music industry that digital downloads remain a peripheral factor and a small percentage of album sales no matter how many trendy albums politicians may claim to have on their ipods.

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7)    It’s not legally possible to establish offshore warehouses as abusive.

HMRC has never tried to do this, and there are very good reasons to believe that the provisions within the Halifax Judgement can be used to demonstrate that the warehouses are abusive particularly if they rely on complex tax structures, are across a stretch of water through fog and rough weather and involve breaking down orders from  customers and  sending goods into the UK in individual jiffy bags rather than in one parcel!  There are much less arguable applications of Halifax that HMRC have pursued successfully. Why they have not pursued Halifax in this area is a mystery. We suspect its because they don’t want to explain to all those companies they let set up offshore why they have suddenly changed their minds.

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8)    It would damage the Post Office.

This is untrue because sales would move on to the mainland.  In fact, the UK Post Office would make higher margins if online stores were to post from the UK to the UK than from the Channel Islands to the UK. It would certainly damage the Jersey and Guernsey Post office but that damage will have been caused by Jersey and Guernsey building business on tax avoidance rather than proper business enterprise.

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9)    It would damage genuine Channel Island offshore mail order companies.

If these are genuinely sound businesses offering value to the consumer, they can compete on an equal footing when they have to pay the same amount of VAT as their competitors.

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10)    The constitutional relationship between the UK and the Channel Islands is more important.

We would hope that the UK government has higher hopes for the Channel Islands than to see their economies sustained purely by tax avoidance. The UK government’s constitutional relationship with its own citizens and businesses, who have to contribute the missing VAT avoided by LVCR abusers, should also outrank this in terms of priorities. Besides, this whole topic is irrelevant to the UK’s legal duty to prevent any evasion, avoidance, or abuse.

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11)     The UK government is under no legal obligation to prevent the exploitation of LVCR.

In reality, the UK government is legally obliged to prevent any evasion, avoidance, or abuse arising from LVCR. We believe circular shipping is an abuse.

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12)     UK Government figures that show that 75% of LVCR is attributable to imports from the Crown dependencies are misleading as they only take in visible imports. Imports from other locations outside the EU such as China, Hong Kong etc. are less visible. Independent assessments put Chinese and HK imports via LVCR at 85% of total LVCR imports.

Invisible imports have always existed and they are non EU goods. You’ll always be able to buy a cheap touch sensitive monitor screen from China and other similar items that you can’t get in the UK. But who cares anyway? Does the fact that LVCR goods also come from other places negate the fact that LVCR exploitation via the Channel Islands is hugely damaging?

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13)     The Channel Islands suffer fog delays and the LVCR provision assists the balance of payments in the Channel Islands and reduces the risk that the Channel Islands become dependent upon EU/UK subsidies.

Fog delays would not be important if they were not circular shipping goods! The important point though is this: if you want to support a region’s economy, do it by helping them to build up genuine productive businesses: a service sector, science and technology, research and development etc. don’t make them reliant on the facilitation of tax avoidance!

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14)     If the Channel Islands were no longer permitted to use LVCR there would be a significant loss of Channel Island Revenue but fulfilment would be relocated to other offshore fulfilment centres such as Hong Kong and China or to Switzerland where VAT is significantly lower and the net loss to the exchequer would be higher than currently seen.

Let’s make abundantly clear two main points here:

i) We do not care what methods the UK Government use to stop this exploitation. They just have to stop it. If, for example, “exempting goods from the Channel Islands from LVCR means people would go to Switzerland” or “reducing the threshold wouldn’t do anything because CDs cost less than that,” then find some other way to stop it! It is not up to a pressure group to suggest how HMRC stop LVCR exploitation but to make sure they understand they have to stop it. Doing nothing does not save any VAT loss.

ii) In our view the abuse in question is the actual practice of sending goods out of the EU and back in, in order to avoid VAT, or holding warehouse facilities for the sole purpose of avoiding VAT. If that is abusive when it is done in the Channel Islands, then it’s abusive when it’s done in Switzerland, Dubai, Hong Kong, anywhere. Whatever restrictions you place on the Channel Islands, place on those other places too! They could send them to the moon and it would still be abusive!

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15) It is not correct that LVCR gives a trading advantage as it could not be shown to be due to just LVCR. This is because (a) There are differing levels of corporate tax and VAT in the EU; (b) Intra-European suppliers enjoy advantages of scale.

Anyone who says that  20% is not a significant advantage must be living in cloud cuckoo land!

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16) Cost advantages actually stem from the lack of application of certain EU initiatives which provide consumers with extensive rights to return goods ordered on the Internet.

This is clutching at straws! If your volume of returns is so high that having to provide replacements would damage your bottom line to the degree of 20% you must be selling crap!   In any case who would deal with a company that wouldn’t accept a return? A profit margin based on not providing customer service …bizarre!

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17) There is no direct obligation for member states to prevent distortions of competition.

The EU Treaties contain articles that obligate member states with regards to preventing distortions of competition and the principle VAT directive contains obligations with regard to fiscal neutrality. The EU is an internal market and preventing distortions of competition due to abuses of the tax system is key to the entire concept. There are also obligations within the LVCR directive on avoidance and abuse, and within the recitals to the directive the intention to avoid distortions of competition is made clear.

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18)  Lower corporate tax rates in countries such as Bulgaria and Switzerland would be likely to cause fulfilment to be replaced to these countries if LVCR were removed.

If it’s abusive in Jersey, it’s abusive in Switzerland and Bulgaria !

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19)  Fulfilment companies would relocate taking advantage of lower corporate tax rates and low VAT rate areas and would use these areas to fulfil orders significantly in excess of the current £18 order value.

Yes it means they might go to a low-tax country and service the UK from there. Except of course they can’t because of the logistical costs and the problems of obtaining UK products in a non-UK territory and more importantly the difficulties in obtaining the cooperation and marketing spend of UK suppliers if you are in another country (for sales purposes the Channel Islands are regarded as being in the UK by most UK suppliers and distributors) For a number of reasons The Channel Islands are the most convenient place from which to operate LVCR exploitation, a fact not lost on the Jersey Post Office who advertised the fact widely on the www.jerseypostlogistics.com website (it was removed in Feb 2006 due to its blatant content but you can still find it here http://web.archive.org/web/*/http://jerseypostlogistics.com )

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20)  If the removal of LVCR stopped UK DVD sales from the Channel Islands other region DVDs would become attractive and also pirate copies would be imported by individuals from other locations such as China and Hong Kong.

This is nonsensical. It assumes that consumers if they have to pay an extra £2 on their CD purchase from Amazon will then trawl the internet looking for vastly inferior bootleg copies from an underground Chinese website! Bootlegs have always existed and are always inferior copies of mainstream only product. File sharing is free anyway so already cheaper than everything.

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21) It is digital downloads, music and video sharing  and the availability of cheap pirate material from the far east that is the real reason for UK music retail declining.

This is nonsensical. It assumes that all consumers trawl the internet looking for vastly inferior bootleg copies from an underground Chinese website. Bootlegs have always existed and are always inferior copies of mainstream product only. File sharing is free anyway so already cheaper than everything.   Digital downloads sales remain pretty much insignificant in the UK.  If nobody wants legitimate CDs and DVDs why is everyone selling them from Jersey?

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22) The logistical cost of operating in the Channel Islands is greater than onshore costs therefore the advantage of being in the Channel Islands is marginal.

So why do they do it?!?!?! If it were that marginal, it wouldn’t be worth the hassle. In fact this is our entire point. The islands are geographically inconvenient so the only reason to be there is to avoid VAT!

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23)      The cost of pirated imports and illegal grey imports is estimated to be in excess of 4bn per year and the removal of the LVCR scheme is estimated to cost over £250 million per year in substituted piracy.

This is nonsensical. It assumes that all consumers trawl the Internet looking for vastly inferior bootleg copies from an underground Chinese website. Bootlegs have always existed and are always inferior copies of mainstream only product. File sharing is free anyway so already cheaper than everything. If nobody wants legitimate CDs and DVDs why is everyone selling them from Jersey? What does increase piracy is a retail structure that only allows those with a credit card to purchase goods. Young people who may not have a credit card and have never seen a record shop will be more likely to download illegal free music.

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24)       The Halifax doctrine does not apply if significant stocks are held on the Islands, so the circular shipping argument no longer holds true.

i) It is possible to tell if an item is circular shipped by looking at the barcode and other identifying features to find out where the product originates. Also a quick glance by HMRC at the supply chain of all the UK suppliers and distributors would show they are all supplying offshore retail directly.

ii) Holding stock or not holding stock makes no difference to the abuse argument.

iii) In the music industry retailers on the Channel Islands take pre-orders for goods prior to their manufacture so circular shipping must be taking place, and there is no way that every single CD is held in stock. Due to the vast quantities of CDs available on offshore websites that is a totally unbelievable prospect, and would in any case make no commercial sense as stock can be ordered as required from the UK distributor  so holding stock on everything would be an artificial abusive arrangement with no real economic purpose.

iiv) Even if goods were not circular shipped, the sole purpose of the existence of any warehouses on the Channel Islands is to avoid VAT, and is therefore in our view an abuse, regardless whether the goods are circular shipped or not!!

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25) Goods are carefully vetted through the LVCR scheme so that there is no grey material or pirated material available.

Rubbish! There are copyright infringing products on every CD website in Jersey and Guernsey just as there are illegal copyright infringing products on every website in the UK. Play.com settled with the BPI out of court for importing grey imports from outside of the EU.

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26) Gaining a VAT free advantage through LVCR is a legal arrangement and a legitimate business practice.

Don’t kid yourself. In our view it’s a tax abuse with no real economic purpose.  Concentrate on customer service and quality products and you’ll create a real business.

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27)     Its a phenomenon of the global economy and everyone complaining about it is stuck in the past.

Let’s get one thing straight. LVCR exploitation makes money because LVCR – a tax relief created by the EU – is being exploited by companies with an eye for an opportunity. It’s got as much to do with the real global economy, or genuine economic activity as taking full advantage of sickness benefits. If it wasn’t for an obscure EU law, the ‘opportunity’ to exploit it wouldn’t exist.

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28)     There is already a level playing field,  since everybody is offshore.

Yes that’s a genuine statement from the CEO of a major offshore retailer.  Not only does it ignore new product sectors outside of CD and DVD sales (a sector which has  almost entirely now gone offshore ) but it’s so stupid that we don’t think it even warrants a proper response, so we won’t give one!

29)     If you took any action to either lower the threshold, remove mail order goods from the relief or successfully remove certain products from the relief then Channel Island Retailers would send items to another EU member state where such LVCR restrictions did not apply and then have the items forwarded to the UK once they were within free circulation in the EU.

Not only would such an arrangement be, in our view,  clearly abusive it would be so complicated we doubt it would be viable. In any case is it acceptable that the UK does nothing at all because retailers ‘might’ find other methods of exploitation ? By the same logic if the police gave up dealing with house burglaries because they said that crime would occur elsewhere anyhow would that be acceptable? There are methods available under EU law for the UK Government to deal with this such as excluding mail order goods and applying it to certain kinds of goods coming from certain destinations if such a ruling is not used in a discriminatory manner and is justified in order to prevent exploitation. What is important is that the UK prevent exploitation. How they do it is up to them.

30) Its being exploited by companies who come to the Channel Islands and give the Islands a bad name. It should only be available to genuine Channel Island retailers.

The first major user of LVCR was Play.com who are always touted as a genuine Jersey company even though they have significant UK offices warehousing and staff. The only reason that major UK companies went to Jersey and Guernsey was so they could compete on the same playing field as Play.com. HMV announced this reason for their move to Guernsey in 2005. To blame UK companies for wanting to get the same advantage when they are being undercut is frankly a joke. Exploitation of LVCR is in our view an abuse of LVCR no matter where you are from and the idea that LVCR is a VAT relief designed specifically for Jersey and Guernsey retailers is utter nonsense!

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31) Its good for Chinese companies to be able to send goods into the UK from The Channel Islands. We are sure it is. But who cares ?  As long as UK products are not being circular shipped we don’t have a problem. Hopefully dodgy counterfeit  Chinese CDs and DVDs won’t be part of the product range on offer along with poisonous health food and exploding electrical goods.

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32) It is not the LVCR VAT advantage that is causing UK retailers to go out of business its the fact that internet retail is cheaper and UK retail is a ‘rip off’. This is pure fantasy. Internet retailers in The Channel Islands pay exactly the same price for their products as UK retailers. The only time that would not be true is if a retailer bought a large quantity of stock and requested a bulk discount. If your business has grown to an enormous size due to the fact you have had a head start on other retailers as a result of a 20% VAT advantage then of course you are in a position to order more stock and demand a bigger discount!

As for the sweeping generalisation that all UK retail is a ‘rip off’ well that’s about as true as the statement all Channel Islanders are tax dodging sharks.

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33) It would be unfair as the LVCR VAT advantage evens up the cost of sending goods to Jersey and Guernsey and we just happen to live here. We are not taking advantage.

We have heard some pretty weak excuses but this takes the biscuit. The cost of sending an item to Jersey or Guernsey in a bulk shipment is pennies. The amount of VAT saved selling it from Jersey is pounds. If it was such a big problem being in Jersey or Guernsey then why would all the UK internet retailers move there ?   Surely not to make more money and gain a competitive advantage ? Of course not!

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34) There is no competitive advantage. We’ll call this excuse LVCR Abuse Denial . Let’s get the calculator out.  If the UK retailer sells an item at cost plus VAT then he makes zero profit, however the offshore retailer can still make a 20% profit if they match the price plus they also still have room to beat it.  So that’s not an advantage then ? The other version of this bizarre excuse is  ‘everyone is offshore anyhow so they all compete without VAT’. Yes, everyone that hasn’t gone bust or who can afford to go offshore.

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35) CD and DVD sales from The Channel Islands are falling. If they are, then that has nothing to do with the exploitation of LVCR and everything to do with the gradual decline in CD and DVD sales (even though between 2005 and 2009 CD sales were up 40% online and DVD sales up 209%)  In any case, if CD and DVD sales have been milked to death by this scam then we are sure that the exploitation of everything from golf balls, hoover bags and tooth brushes will fill the gap in the meantime.

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36) Because the same reasons for stopping the use of LVCR were given fifteen years ago. This gem comes from  The Chairman of the Bulk Mailers Association in Guernsey Mr. Rodney Brouard. Well Mr Brouard, can we suggest that you should have stopped exploiting LVCR 15 years ago!

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37) Few items shipped to the UK now cost less than £18. Another gem from Mr. Rodney Brouard Chairman of the Bulk Mailers Association in Guernsey.  Utter rubbish of course.

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38) LVCR is intended to help internet shopping  so that consumers do not have the inconvenience of  paying VAT when buying goods internationally. We would query the use of the word ‘international’, when many of the goods sold via the Channel Islands are of UK origin, and the internet didn’t exist in 1983 when LVCR was introduced so it can’t possibly have been devised with internet shopping in mind.  In any case since the LVCR directive allows member states to exclude mail order goods from the relief (and the internet is mail order)  the exploitation of LVCR through internet mail order was  clearly not an intended outcome for those who drafted the original legislation! We have already dealt with the inconvenience of paying VAT under excuse 3.

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39) Supermarkets are putting UK Record Shops out of business. More desperate rubbish from those looking to justify VAT abuse.  Supermarkets were an issue for independent record shops back in the early 1990s when independent record shops used to sell chart albums, but those days are long gone. Supermarkets do not sell the same products that independent record shops were selling and have not done so for a very long time. FACT.  What has put UK independent record shops and independent on-line retailers  out of business on the UK mainland is offshore VAT free retail selling the same products the independent retailers sold. Supermarkets sell Chart albums.

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18 Responses to Excuses for the Exploitation of LVCR

  1. Three comments:

    1. Comment 7: it would not hurt Royal Mail – but it would probably kill Jersey Post stone dead.

    2. Comment 8: with the cost of living over here, no legitimate mail-order business would survive a 20% hike in costs.

    3. My own comment: If LVCR were stopped tomorrow, you would treble unemployment here in Jersey, and the people you would hurt most would be the ones who could least afford it.

    I broadly support where you want to get to – but I’m not sure about how you want to get there.

    Mac
    Jersey

    • Mac. We support your view…in part. I think you illustrate the problems caused by firstly allowing an economy to be supported by Tax abuse and by then allowing it to grow to a huge degree as a result of that Tax abuse. Here’s our view. If your economy needs support then perhaps the UK should pay for it and make investment to develop a proper economic base. The view of RAVAS is that UK retailers shouldn’t have to sacrifice their livelihoods to do it. That is unfair by anyone’s standards and whilst we sympathise with a loss of jobs many of us have already lost our jobs and our business, so the sympathy is muted. We have to suffer 20% VAT if we want to trade in the EU, so why shouldn’t Channel Islands retailers particularly if they are selling UK/EU products and operate on the same basis. Other UK Island communities are quite happy without a major mail order sector.

      • That’s a reasonable answer. I presume that when you talk about “other island communities”, you mean places like Shetland, which are not independent and have representation through both Westminster and the Scottish Assembly – which Jersey and Guernsey do not.

        • Yes although you pose the immediate question, if Jersey and Guernsey are independent self governing and voted to remain outside the EU then why should the UK have to support the Islands anyhow? You can’t have it both ways surely? Not that that takes away any blame from the UK for allowing this trade to flourish to it’s current scale. We have read the detailed discussions about the LVCR trade that took place within the Jersey Government in 2006 and the politicians are very poorly informed and very naive. They assume there are no internet operations on the UK mainland and that everyone complaining is a ‘shop keeper’. We have members who were on the internet in 1995 long before any CD or DVD retailer was in Jersey.

  2. Mac,
    I sympathise with the economic plight of the islands should LVCR stop. But then your government really should have asked the question: Isn’t it a little politically and economically naive to encourage the growth of, and investment in, an industry fundamentally reliant on the abuse of a legally binding directive? Did the legal advice they received not point out the implications should things change? Was it not made clear to your electors and investors that there might be danger ahead? Or were they perhaps, persuaded by some unknown “guarantee”?

  3. I think the UK Government have a great deal to answer for here…they are in no way blameless. This is after all something that is under their control since its an import relief.

  4. Excuse 30 is fantastic! Why on earth should ‘real’ Jersey retailers benefit from this tax dodge at the expense of UK retailers? It is the UK allowing this to continue, it is not some God given right of the Channel Islands to avoid accounting for import VAT!

  5. Guernsey Visitor

    Isn’t the real problem the ridiculous 20% rate of VAT – why are you not fighting that?

    Think about it – with a lower reasonable rate of VAT the Channel Islands “advantage” through LVCR gets cancelled out or reduced by the cost of transporting goods to/from the Islands.

    The high rate also makes collecting the Tax more viable – but what happens when the Tax does eventually fall – you have an army of HMRC officers as a cost burden going forward

    So High VAT is your enemy – not LVCR – LVCR just happens to be a contributory factor to the damage that high VAT is having on all UK businesses and residents

  6. Guernsey Visitor – While we would probably all agree that 20% is high, getting it changed is a battle that we couldn’t possibly win.

    RAVAS represents a number of businesses in incredibly competitive industries so even if we managed halve VAT to, say, 10% it wouldn’t be enough.

    That’s not to mention that if VAT were to be taken to 10% that the UK government would need to find an additional £50 billion from other taxation. Setting up an online prepayment system so that Channel Island retailers could prepay the VAT for items being shipped in to the UK would be a lot cheaper.

    • Guernsey Visitor

      Chris

      Thanks for a very reasonable reply

      I agree the VAT change would be difficult – but ultimately it is the battle because the Channel Islands are not alone in the LVCR issue, they are simply in the front line – Switzerland have a similar route into the EU through France – and therefore into the UK. Some companies here – even local ones – talk about relocation to Switzerland as an option.

      The problem for Channel Island companies (as opposed to visiting corporates) is that the “level playing field” you seek is not level. Transport costs to and from the Island would simply mean company’s here going out of business if everything else is equal – now you know how that feels so I would hope you have some sympathy with it.

      The Channel Islands cannot be viewed in the same way as say – the Scillies or the Isle of Wight – they are not represented at Westminster and have no call on subsidies from the UK or EU. So it could be desperate times – I hope a reasonable compromise can be found that allows everyone some peace of mind

  7. Guernsey Visitor – I do have sympathy with the fact that if the rules of LVCR are changed that it will make trading more difficult for companies native to the Channel Islands.

    We do a fair amount of business in Europe. I’d love to be able to use a tax break in order to ship goods from our warehouse to these countries, giving us an immediate and substantial advantage over the local competition. I appreciate however that this isn’t legally possible and even if it were I would feel ethically wrong shipping goods from my country and forcing competitive business people out of work in their own countries because they couldn’t compete when charging their local taxes.

    Unless things are changed your economy is going to become more and more dependant on UK businesses setting up fulfilment operations. Eventually it will reach a breaking point, the government will have to pull the plug, and Guernsey will be in a much worse situation than if this thing is nipped in the bud now.

  8. Guernsey Visitor

    Chris – we are agreeing far to much to suit the current mood!

    I agree that the current situation, particularly with VAT so high and therefore the difference so considerable, is not sustainable.

    The problem for Guernsey is that at one time it was the legitimate markets keader in tomato exports into the UK (no tax issues involved. Then oil prices and EU subsidies made Holland a much cheaper option. Guernsey’s island status and no membership of the EU prevented equal playing field competition. The number of derelict green houses in the island is testimony to the memory of that traditional local industry.

    The question is – what next – and does the UK take any responsibility/notice of what happens here.

    I am not by any means an expert on this topic – but it interests me that EU countries have various levels of VAT and there is no “equalisation charge” cross border as far as I can see.

    So if the Channel Islands joined the EU (highly unlikely) and set a VAT rate at say 5% – presumably there would be no issue? (Well at least not an arguable one)

    If I am right is this how it works with Switzerland who have VAT rates varying from 2.6% to 8%??

  9. Guernsey Visitor – This all assumes the current use of LVCR is legitimate! Which isn’t the case. Under article 145 of the Principle VAT Directive LVCR cannot be allowed if it results in non-taxation in the UK, and Article 1 of the LVCR Directive disallows LVCR if it is being abused (used for a purpose contrary to its intended use, which in this case is to give a VAT advantage to a company trading in the UK rather than an advantage to the importer) leads to tax avoidance or creates a market distortion. All of these are taking place therefore the UK must disallow the use of LVCR. The idea that LVCR is a legitimate method of gaining a trading advantage is wrong, whether its used from Guernsey or Switzerland. Its the UKs application of LVCR which is causing the problem. Furthermore under Article 23 of the LVCR directive perfumes are disallowed. All the perfume companies selling perfume through LVCR are in clear breach of EU law (or rather the UK is for allowing it).

  10. Guernsey Visitor – If the Channel Islands joined EU, had a 5% VAT rate and sold lots of stuff into UK then under EU law Channel Islands businesses would have to register for VAT in the UK after they sold goods over a certain value threshold. Each EU country has a distance selling threshold. So if you are registered for VAT in the UK and supply goods from the UK to customers in another EU country who aren’t VAT registered, you must charge VAT at UK rates until your sales exceed the threshold for that country. Once they exceed the threshold, you must register for VAT in that country and charge their rate of VAT on the sales. If Guernsey was within the EU and had a 5% VAT rate then that rate would be charged to customers in the UK by a Guernsey company until a certain sales threshold was reached. From that point on the company would have to register for VAT in the UK and charge the UK VAT rate. Since the UK mainland is Guernsey’s biggest market all Guernsey businesses would soon be registered in the UK at the UK rate of VAT. There would be no differential. The only way to get the 5% rate would be to travel to Guernsey which is what happens in Europe with cross border shopping. That would seriously boost the local tourist trade. Sounds like a good idea. Why not join the EU!

  11. Guernsey Visitor

    Dave

    Your second posting was very informative – thank you. I am not in the import/export business at either end of this deal – so as I said not an expert by any means.

    How do Switzerland do it then?

    On your first point I think you have to differentiate between unfair and illegal. If illegal activity was taking place you wouldn’t need to campaign for change – which you are – but more simply for enforcement.

    Of course you bypass my points on the difficulties for the Islands and their businesses this first change will kill the flower growers not the cd/dvd market – I guess thats not your problem – which sums up the way of the world these days

    The budget appears to point the way for a successful campaign for you – and the demise of some businesses and jobs in the Channel Islands, at the end of the day ordinary people suffer the loss of their livelihood – and downloading will probably finish the job anyway

    As for the EU – do you really like all your laws being decided in Brussels??? I don’t think the Islands will leap to that fate in the hope of attracting a few extra people in the bucket and spade industry (or worse still hen and stag party’s!!)

    In practice – DVD retail £10 – saving on VAT £2 vs cost of flight around £120 – its not a good business plan!!

    A la perchoine

    • I think your posting illustrates a very interesting point. Why is it a disaster for Channel Island business if they lose a tax advantage and have to trade on a level playing field with everyone else? We all do it! If your business is over because a tax advantage has gone, then clearly the profit was reliant entirely on the tax advantage. That’s not a very good business is it! Personally I think we will have done the Islands a huge favour by ending this. You will have to develop proper business models that rely on customer service, price and products not VAT avoidance. Not sure what you mean by how do Switzerland do it, but if you refer to LVCR use from Switzerland that’s also an abuse if its aim is to sell VAT free in the EU. Basically LVCR was never intended to be used for this purpose in fact the legislation states this kind of behaviour is an abuse. You make the point that we shouldn’t all be ruled by Brussels. I’d point out your entire fulfilment industry is reliant on a law invented by Brussels so I’d argue its actually the CI who seem to have become reliant on Brussels not the UK. All EU VAT law aims to do is ensure everyone competes on a level playing field and nobody cheats the system. Frankly this operation was cheating the system pure and simple. I sympathise but after 28 years of this I am sure there are many UK businesses who have folded, not because they have lost a tax advantage but because they were essentially cheated out of a sale by those abusing VAT. Looks pretty unfair to me.

  12. Guernsey Visitor

    Dave

    Firstly I should point out that the clue is in my name, I do not speak for the Island as I am a UK Citizen and therefore merely a visitor.

    I take it you have never lived on a small island – or you would recognise my point that the playing field is not level when the tax situation is resolved because of the expensive cost of transporting goods across the seas that divides us. For Guernsey grown/produced goods there is no option on that.

    If you don’t know what I mean by how do Switzerland do it – perhaps RAVAS needs a Brussels office to monitor what happens elsewhere that brings goods into the UK without attracting UK VAT. LVCR only applies to imports from outside of the EU – do France,Italy and Germany police as closely as you?

    Your aggressive tone prevents me from going further in this discussion as I would clearly be wasting my time. At least Chris was prepared to consider the plight of those people in Guernsey who will lose their jobs and some of them family businesses that have existed for many years – EU subsidies do not keep playing fields level and not everyone is cut out to work in the finance industry or online betting.

    GV

    • I’m sorry you think my tone is aggressive.Its realistic I’d say. I think you are misinterpreting it. Do I realise that Island communities need support? Yes of course.Do I think that perhaps UK Governments should support them ? Perhaps, although Guernsey has billions in offshore trusts and also appears to not want UK support either (its avoided EU for a start) Do I think that Guernsey should be supported through VAT avoidance that puts me and other UK retailers out of business by effectively taking sales away from us. NO! Do I have sympathy for anyone who was doing that ? NO! Do I have sympathy for anyone employed by someone doing it..of course, but they should take that up with their employer or the local Government, just like RAVAS had to. I know people who lost their jobs in UK. In answer to the question do France Italy etc. police as close as UK, I know that some EU states police even more such as Denmark. Not really sure what your point is though. All EU member states are bound by EU law and have to police it. I think this issue is pretty much dealt with now and its clear that the EU won’t tolerate it. Yes, RAVAS has Brussels representation. See this.
      http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/8450357/EU-expects-more-changes-to-Channel-Islands-VAT-loophole.html

      I think that pretty much wraps it up.