On the 15th of March 2012 the High Court in London finally ended the abuse of LVCR from the Channel Islands. You can download the full Judgement here : Judgement LVCR Guernsey 15.3.12
RAVAS (Retailers Against VAT Avoidance Schemes) intervened in the hearing at the last moment in order to submit information to the Court that illustrated how Channel Islands retailers had abused the import VAT relief in order to avoid VAT on mail order sales within the UK. Thanks to a number of financial contributions from its members at very short notice, RAVAS was able to mount a powerful challenge to the arguments presented by the Channel Islands, who fought hard to keep RAVAS out of the hearing. Channel Island retailers clearly knew that RAVAS would produce embarrassing evidence of abuse and avoidance.
RAVAS Spokesperson Richard Allen was at the hearing for all three days. His report follows the video below.
” I was at all three days of the Judicial Review held before Justice Sir John Edward Mitting at the High Court of Justice Queen’s Bench Division Administrative Court in London between the 13th and 15th of March 2012. It now seems starkly clear that if RAVAS had not intervened in the hearing the UK government may well have lost the legal challenge as their initial defence was very weak. Our intervention in the JR concentrated minds on tax avoidance and the abuse of LVCR which had been the subject of the RAVAS complaint to the EU.
The initial argument in HMRCs pre-action response letter to Jersey and Guernsey, was that volumes of goods from Channel Islands were high and that this high volume of goods gaining LVCR was distorting the UK market. The UK argued that it was justified in removing LVCR because of this distortion. This argument was thrown out early on in the hearing by the Judge as Mr Grodzinski, QC for Guernsey, argued that the high volumes of LVCR goods were due to the fact the Channel Islands were successful at internet retail and this could not be regarded as a distortion but merely successful competition. He pointed out that the Channel Islands success was not a good enough reason to discriminate against the Channel Islands. He also queried why HMRC had said they would not be pursuing abuse and avoidance arguments in their pre-action letter, yet in their skeleton argument they had stated they would. He did not understand why HMRC had suddenly changed their position particularly when they had not provided any evidence of abuse or avoidance. This change in direction was the result of the intervention of RAVAS. At the end of the hearing when costs were awarded, The Channel Islands had a slight reduction in costs due to this last minute change in arguments by HMRC which they claimed had resulted in extra work at short notice.
The core of RAVAS members provided evidence of the abuse of LVCR and avoidance of VAT in the form of detailed witness statements, which proved crucial to the final result of the hearing. The statements that RAVAS provided concentrated on the practices of circular shipping UK products and splitting down single customer orders into individual packages across a number of sectors including CDs, DVDs, Horticulture, Computer Games, Ink Cartridges and Domestic Appliance Spares. The practices of order splitting and circular shipping UK products (to order) are used by Channel Islands retailers so that they are able to factor the LVCR advantage into the individual prices of the goods they sell and offer a comprehensive range of items without holding stock on everything. As a result of our complaint to the The European Commission both of these practices are regarded as abusive and have resulted in LVCR being used for “a purpose for which it was never intended” namely retailing in the UK/EU by mail order VAT free. Justice Mitting congratulated our legal team on its presentation and at one point, when Jersey’s QC David Vaughan said that circular shipping did not take place, he laughed and said: “The RAVAS evidence would seem to suggest otherwise!” Incredibly, as confirmed by Guernsey’s QC Sam Grodzinski, HMRC submitted nothing in the way of evidence of the activities of Channel Island retailers to the court. They also appear to have relied initially on internal HMRC lawyers who have proved over the years to have little clue to what was going on in relation to LVCR abuse. Once HMRC went out to independent counsel things improved dramatically and Phillippa Whipple QC, who worked closely with our legal team, was excellent.
Essentially the heart of the Channel Islands case put forward mainly by Mr Grodzinski was that:
* The term mail order did not include internet retail;
* The wording of the LVCR directive was not clear, so the UK could only exclude all mail order goods from LVCR — not just from the Channel Islands;
* The UK was discriminating against the Channel Islands under the EU concept of Fiscal Neutrality, which they argued meant that member states of the EU had to not only treat other EU states equally but also non EU states.
Justice Mitting addressed Miss Whipple (HMRC) early in the hearing stating that the nub of the case was whether or not the UK could exclude the Channel Islands selectively from LVCR . He stated “If you are right on that point you win but if you are wrong your case collapses” . Miss Whipple countered the fiscal neutrality and discrimination arguments referencing EU case law that supported legitimate trade sanctions placed on imports of mushrooms from Taiwan by Italy. She clarified that fiscal neutrality was a concept of the internal EU market and that LVCR was a relaxation of fiscal neutrality for administrative purposes adding that the UK was obligated to prevent LVCR being abused for tax avoidance. She stated that LVCR was being used for exactly that purpose by Channel Islands retailers and that removing mail order goods would actually restore fiscal neutrality. She also addressed order splitting quoting case law involving a Cosmetics retail operation, and stated that Channel Islands businesses were structured in such a way that a single economic activity was being broken down in a manner that created a series of artificial smaller transactions, so as to take illegitimate advantage of a fiscal opportunity. She went on to point out that there was a complaint at the European Commission regarding Channel Islands use of LVCR that had been upheld and that this obligated the UK to act and prevent this abuse avoidance and distortion. Miss Whipple pointed out to Justice Mitting that the UK would face infraction proceedings by the European Commission if it did not end this abuse.
On the question of the definition of mail order Justice Mitting stated early on in the proceedings that, as HMRC argued, mail order could be defined as any sale made under a distance selling arrangement. He said that it could not be reasonably confined to orders placed by mail and gave a history of mail order since the 1800s to prove the point, arguing that customers had placed orders by telephone and fax for many years and that this had been regarded as mail order, so why not by email or online ?
RAVAS’s counsel Christopher Vajda QC — and his team of Valentina Sloane and Julianne Stephenson — delivered a superb 45 minute presentation pointing out to Justice Mitting that the UK had complete discretion with regards to the way it exercised the mail order goods exemption; a power to exclude mail order goods from LVCR that has been granted to member states by Article 23 of the LVCR directive since 1988. Mr Vajda also pointed out that the UK was obligated under Article 1 of the LVCR directive to “apply the exemptions” under “conditions fixed by them” to prevent any evasion avoidance and abuse. Justice Mitting however seemed unconvinced as to whether Article 1 could actually impose “conditions” on Article 23, if Article 23 resulted in the removal of mail order goods altogether. Mr. Vajda reminded the Judge that he should not be preoccupied with technicalities of construction and that this case had to be viewed not from an Anglo Saxon viewpoint but from the perspective of European Law which was based upon intent. He added that if this was the Chancery Court in 1845 he would agree with Justice Mitting but it wasn’t and under EU law the intent of the directive was to allow a limited breach of fiscal neutrality whilst also obligating member states to prevent avoidance, abuse and distortions of competition arising from LVCR. Mr Vajda stated that all of these elements were clearly highlighted in the LVCR directive and that the power to exclude mail order goods under Article 23 could be used to impose a condition that would satisfy Article 1 and prevent avoidance and abuse. Because the power to exclude mail order goods was an unfettered by any limitation the UK had the discretion to apply it to just the Channel Islands. This he argued, was the correct interpretation of EU law.
Unfortunately Justice Mitting doubted that items other than mail order goods would benefit from LVCR and he therefore concluded that excluding mail order goods was effectively removing the exemption completely. He therefore dismissed Mr Vajdas argument that Article 1 could impose conditions on Article 23 if Article 23 removed LVCR completely. This was a factually flawed conclusion since LVCR does indeed not just apply to mail order goods but also exempts from VAT ‘merchandise in baggage’ carried by travellers, and commercial consignments ‘not for sale’ with a ‘negligible value’ such as manufacturing parts, artwork, replacement spares, photographs, media storage devices, samples and so on. LVCR was originally introduced in order to relieve administration on exactly these kinds of ‘negligible value’consignments when customs borders still existed within the EU and goods often had to pass through more than one internal customs border. It follows therefore that if only mail order goods have been exempted from Channel Islands goods qualifying for LVCR, that LVCR still applies to ‘merchandise in baggage’ and commercial consignments not for sale. LVCR has therefore not been removed completely from the Channel Islands contrary to press reports that state LVCR has been ‘scrapped’.
Justice Mitting did however accept Mr Vajda’s point that other EU VAT exemptions with similar powers were limited in some form if limitation was intended and therefore, the UK could clearly do what it wanted. In retrospect this was probably the key moment of the hearing and its significance has been entirely missed by the media.
The last day and a half seemed to go really badly for RAVAS/HMRC. It appeared that the Judge was on the side of the Channel Islands and was going to rule against HMRC/RAVAS. Justice Mitting made a comment about the UKs responsibility to the economies of the Crown Dependencies but Mr Vajda reminded Justice Mitting that this was a court of law not a political arena. Justice Mitting also appeared sympathetic to Channel Island retailers that were having to close (he failed to mention the many UK retailers that have suffered) and made a generalised comment about the exploitation of a legitimate fiscal measure such as LVCR not being abuse and avoidance. Whilst he did unconditionally accept that circular shipping was an abuse he seemed to regard it as a rare practice rather than the norm. His view on order splitting and avoidance of VAT was equally confused. He suggested that Channel Island retailers were doing nothing beyond accepting orders from customers and supplying them, in the ordinary course of their trade. He went on to say that the fiscal advantage afforded by LVCR gave Channel Island retailers an economic incentive to conduct that trade from the Channel Islands, but because this was the ordinary course of their trade, this was not abusive. He pointed out that since VAT on importation was payable by the consignee, the customer was avoiding VAT not the Channel Islands retailer. These conclusions are inaccurate because splitting single customer orders down into multiple packages is clearly not ‘the ordinary course of trade’ and VAT in the Channel Islands on mail order is payable by the sender not the customer due to the pre-paid VAT scheme that operates in the Islands.
The reality is that abuse of LVCR which Justice Mitting had accepted in his Judgement was not the exception but the norm. The widespread abuse of LVCR is underlined by the fact that LVCR simply cannot be exploited in the ‘ordinary course of trade’ without circular shipping and order splitting – facts that are public knowledge in the entertainment retail business. Justice Mitting admitted, however, that determining the level of abuse was not required in order to deal with the legality of the UKs legislation which was the purpose of the hearing. It is also unsurprising that he was confused about the levels of abuse given he had only seen one-sided, unchallenged submissions from Channel Island retailers! RAVAS did not get to see what the Channel Islands businesses had put in as evidence because the Channel Islands had demanded that whole sections of their skeleton arguments were redacted. As a result we couldn’t directly counter what they had said, a state of affairs strongly objected to by our QC Mr Vajda.
It is also interesting to note that in response to evidence RAVAS submitted to the court of order splitting Channel Islands traders submitted statements that claimed items were being sent individually not to avoid VAT and claim LVCR but to make things more convenient when packing and to make sure packages could fit through customers letterboxes! (even though one of our examples of order splitting related to a box set that wouldn’t fit through a letterbox!). Not only is this odd practice of ‘convenient’ single item packing unique to LVCR abusers but the statements given to the court highlight a major contradiction, in that Channel Island retailers claimed LVCR wasn’t important to their business but at the same time told the court that if LVCR was removed on mail order goods they would have to close down their businesses ! .
In any event the issues of abuse and avoidance addressed by the Judge were Obiter Dictum (passing comments) and were not the subject of the JR. Claims from Channel Islands politicians and businesses that LVCR use for mail order as practised in The Channel Islands is now legitimate are not accurate. In theory the use of LVCR could be legitimate if only genuine, complete orders qualified for the relief but the artificial splitting of single orders for multiple items into individual packets along with circular shipping UK goods are methods used by retailers to incorporate the benefit of the import exemption into their pricing structure so they can sell VAT free in the UK. That is clearly not a legitimate use of the relief and is clearly an abuse indeed if LVCR is applied correctly by member states free of avoidance evasion or abuse it cannot be used as an ‘economic incentive‘ for mail order as suggested by Justice Mitting. The test of abuse is therefore whether the relief is being used as an ‘economic advantage’.
Justice Mitting read out his final Judgement just after 3 ‘o’ clock on the 15th of March. He gave a lengthy presentation detailing all the issues. It was a very tense moment as the final operational part of the Judgement was read out. In the very last part of his judgement Justice Mitting ruled against the Channel Islands. He ruled that the power to exclude mail order was unfettered by any limitation, a point that had been highlighted by Mr Vajda and further concluded that Fiscal Neutrality only applied between member states and not between an EU state and a non EU country, as Miss Whipple had argued and as has been outlined on the RAVAS website. Justice Mitting ruled the UK therefore had the power to exclude mail order goods if it wanted and could discriminate against the Channel Islands if it also wished to do so.
HMRC with the assistance of RAVAS soundly defeated the Channel Islands which had used, amongst others, Price Waterhouse Cooper to represent them. I estimated that there were also 30 lawyers in the room representing various major retailers and Channel Islands firms. One lawyer I spoke to represented six companies. The Channel Islands had tried to suggest that RAVAS was backed by a supermarket and demanded to see our membership list. They must have been surprised when they saw we were a group of angry little guys. It was David and Goliath stuff.
As Judge Mitting put down his paperwork, having concluded his judgement, he smiled at the assembled army of lawyers and said “Does anyone want anything kept confidential?” David Vaughan the QC for Jersey responded in a rather despondent tone “Only the result….”
David Greene, a partner at Edwin Coe, who represented RAVAS, summed up the final ruling in a statement to the Guardian “RAVAS and its members have been campaigning for the past 10 years to abolish the loophole that allows retailers based in Jersey and Guernsey to avoid VAT on low value goods ordered over the internet by UK consumers. As a result of RAVAS’s pleas to the European commission, the UK government clamped down on this abuse. UK retailers have been seeking an even playing field but have been competing with supplies from the Channel Islands with one hand tied behind their back.”
Whilst LVCR abuse is not completely dead yet RAVAS has successfully helped the EU clarify the mail order exemption power in the LVCR directive. Member states are now free to exclude mail order goods that originate from non-EU territories being used as a base for abusing LVCR. The power to exclude mail order goods selectively is a very powerful weapon and makes LVCR fulfilment a far less certain prospect for those who wish to make VAT avoidance a core part of their retail strategy.
RAVAS will be continuing this battle at www.ravas.org.uk