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Out of Control Channel Islands VAT Avoidance Scheme Undermines Credibility of Osborne’s VAT Increase

RAVAS PRESS RELEASE 4 . 01 .2010

The Treasury has lost control of an obscure VAT avoidance scheme of which George Osborne was personally aware before taking office. Treasury and HMRC Officials have for 15 years continually underplayed the effect on the UK economy of the abuse of an obscure EU VAT relief on genuine postal imports into the EU that is being exploited on an industrial scale by internet retailers in The Channel Islands. Goods are circular shipped to operations in Jersey and Guernsey so that they can be posted back into the UK and benefit from Low Value Consignment Relief (LVCR) which exempts goods from VAT below £18 in value. This indefensible practice involves complex offshore company structures allowing both UK and Channel Island retailers to avoid VAT on their sales in the UK. Not only does this distort the UK market driving UK mainland retail out of business, but it also gives a tax advantage to those consumers who shop online at the expense of other UK taxpayers who do not.

In 2004 major retailers such as Amazon and Tesco complained to Treasury officials that they would be forced to locate their internet businesses offshore if the Treasury failed to prevent what was by then already a big business and growing market distortion. The fact that goods were being deliberately exported to the Channel Islands first in order to benefit from the relief did not seem to concern Treasury officials who, ignoring basic safeguards to ensure the prevention of tax avoidance and tax abuse,  claimed in 2006 that “Using the relief to sell goods to customers free of VAT is completely legal”.  By 2010 unsurprisingly every major retailer in the UK operating an internet site was taking advantage of the VAT avoidance scheme whilst those that couldn’t afford the huge fees to register a business in the Channel Islands saw their sales dwindle.  Sainsbury only recently set up in Guernsey after UK officials had made more hollow assurances that the VAT avoidance was under control.   In 2009 Treasury officials estimated the loss of VAT at £110 million but this figure is wildly inaccurate with verified sales figures for CDs and DVDs showing that £165 million was lost on CDs and DVDs alone in 2009. Across all product sectors and with such a huge price saving available to anyone who wants to shop on-line, it would not be inconceivable that losses run close to a billion pounds a year in VAT that would have otherwise been collected in the UK.

Since the mid 1990s what has become known as the ‘offshore fulfilment industry’ has grown at an exponential rate firstly with flowers contact lenses and Ink Cartridges being routed through the scheme and then more famously CDs and DVDs. Now with the industry highly mechanised and helped by the unofficial customs agreements in place between the UK and The Channel Islands, virtually every conceivable product is available VAT free including car parts, batteries, fishing tackle, cosmetics, toys, greetings cards, computer games, computer memory cards, phone spares, cooking utensils, camera spares, lifestyle gifts, men’s grooming products, electrical goods, hoover gags, golf balls and anything that is valued under £18.

Retailers Against VAT Avoidance Schemes (RAVAS) has been set up to give a voice to retailers suffering from this VAT avoidance through the market distortion it creates. Spokesperson Richard Allen states:

This is possibly the most damaging tax avoidance scheme in the last decade as it has a direct impact on virtually every single UK retail business. The suggestion from George Osborne that the VAT increase is fair is total nonsense in the light of the fact that any company that can afford to avoid VAT can easily do so by setting up offshore. This abuse is not only morally offensive but it runs contra to all principles of fairness in the tax system and undermines the integrity of the Common Market damaging small businesses before they can even get off the ground and creating a considerable financial barrier to market entry on the internet. You have to go offshore if you want to sell any quantity of goods on-line. When in 2005, we asked Treasury officials if they would consider removing VAT from all goods below £18 in value they laughed, yet they have done exactly that but only on the internet, and only for those who can afford tax avoidance structures in the Channel Islands”

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2 Responses to Out of Control Channel Islands VAT Avoidance Scheme Undermines Credibility of Osborne’s VAT Increase

  1. annon lvcr expert

    The existing EU treaty on LVCR allows the UK govt to reduce this “pragmatic” tax concession from Euro 22 to Euro 10 at it’s own bequest. The cost of this change because of changes in how tax is now colected by HMCE since the concession was agreed would result in no corresponding tax collection cost ( why it was first allowed). This would raise by my estimates over £100m in tax revenue and level the playing field a bit. I have e-mailed the Govt several times offerring to meet up and explain the detail without even the courtesy of a reply.

    • We would be very interested in talking with you. We have had various statements from HMRC/Treasury re cost of collection which we find hard to believe. Are you able to contact us through the contacts page (‘What Can be Done?’ above)