So far the UK government appears to have been remarkably defensive of the industrial exploitation of LVCR which is puzzling given that it is severely affecting many mainland based businesses, not to mention costing the UK Treasury hundreds of millions in lost VAT.
In the 2006 budget, the Labour government declared that :
“In 1984, a VAT-free threshold on imports of small commercial consignments from outside the EU was introduced at a level of £18, as an administrative relief. The Government is aware that this provision is currently being exploited….If the relief continues to be exploited by businesses using offshore locations, the Government will consider changes to prevent this type of behaviour”
Despite the exploitation continuing the government has taken no direct action at all.
The UK government also appears to consistently underestimate the amount of revenue currently being lost to the Islands; it’s current official figure is £110 million in lost VAT from all destinations into the UK. This is a ludicrously low estimate. The Entertainment Retailers Association place the figure at £165 million for CD’s and DVD’s alone and at least 90% of that is due to The Channel Islands. This figure also doesn’t include the huge markets of computer memory cards (an industry 7 times bigger than the music industry) computer games, health foods, other computer products, camera spares, mobile phone spares, greetings cards and many other high volume low cost goods that are currently being shipped to the UK.
In early 2010 the UK Treasury issued a statement to the Guardian stating that:
“The implication that businesses are simply setting up on the Channel Islands to take advantage of this relief is not true. In fact exports from the Channel Islands account for a very small percentage of the CD/DVD market”
However this statement contrasts dramatically with CEO of Jersey-based Flying Brands Mr Mark Dugdale who stated in 2005 that “The removal of LVCR would undermine the reason to be here at all”
Rather than taking direct action the UK Government has instead left the Channel Islands governments to regulate the trade internally.
In 2007 the Jersey government announced that it would no longer be granting licenses for CD and DVD retailers. Unfortunately by this point the CD and DVD industry was already based almost entirely offshore so rather than curbing the problem it simply reinforced the already strong positions of Jersey based retailers such as Play and Thehut.com. Limiting the licenses for companies within the CD and DVD market only is very much underestimating the scale of a problem as the real growth areas presently are those outside of this one industry. Furthermore it is the volume of goods being sold not the number of retailers that is the problem. Limiting the number of retailers does nothing to prevent the sale of goods VAT free from the Channel Islands and the ongoing exploitation of LVCR.
In any case in 2007 Jersey also asked certain UK retailers to cease their operations on the Island. One such retailer was Tesco who kept their offices in Jersey, moved their fulfilment operations to Switzerland briefly and then moved to Guernsey with the help of TheHutGroup.com.
Jersey Licences to sell goods other than CDs and DVDs are not being restricted and we are also aware of offshore trust companies offering to set up Jersey operations with Jersey Directors .
Steps that Guernsey has taken in order to protect the viability of the offshore fulfilment industry revolve around a voluntary code of conduct whereby participating companies agree a cap on the amount if VAT they can avoid by way of Low Value Consignment Relief (LVCR). The legality within EU law and the effectiveness of these voluntary and unenforceable arrangements remains to be seen. The code appears primarily to refer to the CD and DVD market and ignores the larger growth areas listed above.
The reality is that the UK Government has done nothing to stop the increasing use of LVCR and the Channel Islands retailers continue to exploit LVCR, seemingly with the blessing of HMRC.
What Government reaction would that be then ?