A group of retailers headed by a Health supplement mail order company is threatening to take the UK Government to Judicial review over the removal of LVCR from the Channel Islands. It is not understood exactly what the challenge would be but since the UK not only has the option to allow or disallow LVCR but also the discretion to apply LVCR in a manner that prevents tax avoidance and the abuse of the relief, the argument would appear to rest on whether or not operating a mail order and fulfilment business from the Channel Islands, in order to use LVCR to retail VAT free on the UK mainland, is an abuse .
RAVAS understands that the UK Government took action after clarifying the legal issues with the European Commission who are not only supportive of the UK’s removal of LVCR from Channel Island mail order goods but responded to a complaint from RAVAS that the UK had failed to take action to prevent an abuse of the import VAT relief. The UK is obligated by both the LVCR Directive and the Principle VAT Directive to prevent LVCR being abused and used for tax evasion and avoidance particularly if it leads to a distortion of competition in the UK. One of the measures available under the LVCR directive to combat abuse is to exclude mail order goods from the relief.
Channel Island retailers claim that they are being discriminated against because other countries can use LVCR, but the reality is that the same scale of abuse and it’s impact on UK competition is not apparent from other locations particularly in the horticultural sector. Horticultural goods are only circularly shipped via the Channel Islands as it would not be possible to circular ship plants over very long distances.
The UK government has stated that its removal of LVCR only applies to Channel Island imports because that’s where use of the tax relief system is excessive. The rationale behind the UK’s initial application of LVCR was that the quantity of low value goods imported into the UK was minimal, so the amount of sales tax generated by low value goods was nominal, and therefore not worth collecting once admin costs were taken into account.
However if a large number of businesses then capitalise on the relief the volume of goods ceases to be minimal, therefore the total sales tax that could be collected also ceases to be nominal and therefore the logic for the application of the relief no longer stands. Seen in combination with the obligation under EU law to prevent deliberate abuse, evasion and avoidance which leads to market distortion – and there needs to be mass abuse of the relief system for that to happen – then there is clearly a logical reason for the UK to only target those places where LVCR is used to excess.
The evidence of a distortion of competition as a result of the Channel Islands abuse of LVCR is overwhelming and the scale of the industry clearly justifies the UK’s actions.
Businesses in Guernsey have attempted to blame UK companies that have located to the Island for causing the UK Government to take action, ignoring the fact that it was ‘genuine’ Guernsey business that first took advantage of circular shipping UK goods in order to trade VAT free on the UK mainland. Deputy Carl McNulty Bauer claims that Guernsey did not encourage companies to take advantage of LVCR on the Channel Islands. This is a statement that many would dispute, particularly those major UK retailers now based there who were not only courted by the Guernsey Post Office and The Guernsey Government but had to take advantage of LVCR in order to compete with competitors already operating from the Island. Major UK based online operator Thehut.com has a fulfilment business on Guernsey serving various websites including UK supermarkets such as Tesco, while Sainsbury only recently moved to the Island. Both the Guernsey Government and Post Office are responsible for encouraging the growth of the LVCR industry and it should be no surprise to the Guernsey Government that the UK has been forced to curb it.
In an interview with Channel Islands Television David Gauke the UK Exchequer secretary confirmed that the UK would take action against any abuse of LVCR from any location if it was to become apparent. He also confirmed that The Channel Islands were the major source of abuse of LVCR which is why they had to act.