Home » VAT » Why was LVCR ever Required for the Channel Islands ? A history of the ‘VAT Loophole’.

Why was LVCR ever Required for the Channel Islands ? A history of the ‘VAT Loophole’.

LVCR is supposed to reduce collection costs of VAT on low value imports into the UK/EU. That is its only purpose in law. Those who support LVCR abuse often refuse to acknowledge the term ‘VAT loophole’ claiming that it isn’t a loophole. However as we will explain, the loophole is the interaction of The Channel Islands position alongside the UK/EU and the unintended result of the pre-paid VAT schemes and LVCR. These three factors have created a ‘loophole’ in the law that has allowed companies to turn a VAT import relief into a VAT free trading advantage, a purpose totally contra to the intention and purpose of LVCR.

The Channel Islands have a special relationship with the UK and whilst they are within the customs territory of the EU they remain outside of the EU for VAT purposes. Because of this VAT is payable on import for goods entering the EU from The Channel Islands.

From the introduction of VAT in 1972 up until 1983  VAT was pre-paid on most packages sent to the UK from The Channel Islands through what is known as the VAT pre-paid  scheme.  This came into existence because Channel Islanders complained that the collection of VAT on import into the UK was causing delays resulting  in cream and flowers decaying in customs. The UK Authorities encouraged this scheme because it made VAT collection easy whilst CI horticultural mail order retailers were also happy to pre-pay VAT if the goods reached UK customers faster and in peak condition.

However, for reasons unknown, when LVCR was introduced in 1983 by the EU, the UK decided that  they would also allow LVCR  on mail order goods coming in from the CI, even though the arrangement would result in a loss of VAT that was already being collected on a pre-paid basis . Under the LVCR Directives 83/181 the UK could have excluded mail order goods since the pre-paid scheme was working well and LVCR was not required on goods from the Channel Islands as the cost of VAT collection was already zero.  Why the UK didn’t exclude CI mail order goods at this point is a mystery. It almost appears deliberate.

The equally misguided  document VAT :  Assurance Review of Channel Island Goods, commissioned by HM Customs and Excise in 1997 concluded that LVCR wouldn’t be abused since the authors of the report took the view that the bulk shipping of goods from the UK to the islands for breaking down into VAT free mail order shipments to UK customers was not a viable practice. However it expressed this only in terms of horticultural goods, ignoring the impact on non-perishable items, even though there were already companies on the Islands ‘circular shipping’ from/to the UK both horticultural goods and non perishable goods in order to avoid VAT!. Again, another convenient  ‘omission’ resulted in the report passing over the obvious advantage that LVCR would give retailers in the Channel Islands who wanted to sell UK goods VAT free by mail order.

The ‘VAT loophole’ was born as the direct result of the action of the VAT pre-paid schemes + LVCR which together gave CI mail order a huge advantage over UK retail. Additionally with the mid 1990s expansion of the  pre-paid scheme to include non-horticultural goods,  Channel Island mail order was now able to sell anything through the VAT Loophole. Is it a merely coincidence that a trading advantage of this kind emerged in the Islands just as internet retail started to take off ? Certainly the fact was not lost on Jersey Post Logistics who began advertising Jersey as a major internet fulfilment hub in Europe able to offer the advantage of VAT free internet retail to prospective clients.

From 1983 the pre-paid schemes allowed goods to enter the UK rapidly with VAT paid, as  if they had been sent  from a UK mainland destination, whilst LVCR also allowed the same retailers to trade within the EU but VAT free up to £18.  This combination gave CI retailers an unfair advantage over UK retailers who began to see their customers migrate to offshore suppliers.

In 1998 Play247.com started trading and by 2004 Play.com was the most well known Channel Island VAT free retailer. Shortly after this the offshore VAT avoiding fulfilment industry grew rapidly in size destroying swathes of UK mainland retail.

The net result of the VAT Loophole was that a  tax relief that was supposed to reduce tax collection costs in the UK had been implemented in such a way that it lost vast amounts of tax and destroyed UK mainland business.

 

 

13 Responses to Why was LVCR ever Required for the Channel Islands ? A history of the ‘VAT Loophole’.

  1. Amazing…..something very weird went on when LVCR was introduced to the Channel Islands. This VAT loophole almost looks deliberate. How is it possible such huge operation grew without HMRC being aware of it ? I wonder who paid off who.

  2. Thies Van Rubentrof-Molotov

    Quite! I definitely think there’s more to this than meets the eye. Perhaps a crime has been committed? Whilst we have been concentrating on the minutiae (sic), looks like other forces may have been at work. Perhaps another case for Bergerac – or should that be another case of Bergerac. I’m sure there must be some pointers to what went on under the 30 year rule by now??

  3. “…Those who support LVCR abuse often refuse to acknowledge the term ‘VAT loophole’ claiming that it isn’t a loophole…”
    Is it an ‘abuse’ to operate within the law? Wasn’t LVCR brought in EU-wide to avoid the cost of collection of VAT that outstripped the amount collection; therefore an advantage to the EU tax authorities?

    Turkey(an EU candidate country) makes, specifically for export out of Europe, products specifically made to avoid import duties of approx. €2,000,000.00

    I wonder if those bitching about how unfair LVCR is, will bitch about that lucrative ‘loophole’ once Turkey joins the EU and the ‘unfair’ income is added to EU income??

    Will they fight to ensure that UK companies exporting from the EU don’t charge their customers EU VAT??

    • Don’t quote selectively. LVCR is legitimate, circular shipping isn’t. Circular shipping is not within the law as this piece clearly states (and as confirmed by the EU) and if companies circular ship into the UK via Turkey that would also be an abuse (can’t see that happening). We suggest that rather than aiming at RAVAS those who are frustrated by the mess that is LVCR should aim at Senator Ozouf and Gordon Brown the two people responsible for allowing LVCR abuse to boom in the Channel Islands in the first place. We have certainly made our views clear to the UK Government. All we ever wanted was a level playing field.

      • It’s revealing how vaguely you answer my questions regarding the unleveling of the playing field when it’s in favour of the EU.

        I totally understand not wanting others to have any competitive advantage over yourselves; but that’s a 2way street, and you want to fight on an issue of ‘fair play’ then you have to accept that you shouldn’t limit the ideology of fair play to a single tax issue.

        I wonder how many of you member retailers supply the export market without reducing their sales pricing by the 20% VAT? Where do you think that additional 20% goes; given unnecessarily to HMR&C? or pocketed by the retailer?

        If you want Gordon Brown to take the blame for the current situation, then go ahead I guess; but blaming Senator Ozouf doesn’t make any real sense. Why should another countries government be responsible for limiting the legal trade of it’s people, for the benefit of another free and democratic country who’s government aren’t willing to amend their own laws to achieve the same?

        In fact that the Channel Island governments DID take action to limit the number of companies without legitimate reasons for trading from within their Bailiwicks suggests that perhaps the ‘blame’ should be directed solely at the UK/EU government.

        And circular shipping IS legitimate; what you mean is taking EXTRA actions(such as circular shipping) to achieve an illegitimate result(such as my Turkish example) I still question whether your members will happily destroy thousands of legal jobs of Turkish people, calling for the closure of their businesses to create a level playing field on their entry into the EU? I suspect not, because it’s not really a level playing field you’re after, just your own prosperity.

  4. 1) You opted to remain outside of the EU so don’t complain about cross border issues when you had the option of being within the common market.
    2) Senator Ozouf encouraged growth of an abuse of an import relief that was always going to end. He’s free to do that but hardly sensible is it, particularly when a glance through LVCR legislation reveals its clearly illegal.
    3) Unlike you we have met with the EU and they certainly regard circular shipping to achieve a result contrary to the intention of the law as an abuse, indeed they have threatened the UK with infraction proceedings if they do not stop this, hence the recent changes.
    4) Your point about Turkey whilst interesting is not really relevant to this issue. We are not here to cure the ills of the EU or the fairness of tax in general. All we ask for is that the existing rules are enforced in relation to VAT in the UK/EU. Avoidance through LVCR using circular shipping is specifically prohibited under EU law and for good reason….it stops the market being distorted.

  5. 1) ‘You’ Hmm, implies that you take a a very them and us approach; I don’t recall stating whether I was within or without of the EU. Nor do I recall any complaint about cross border issues; I’m happy that individual countries operate their borders as they see fit; my only real ‘complaint’ was how this is portrayed by those that do admit to having vested interests.
    2) Illegal? Obviously the practice of selling across borders is NOT illegal, and working within the laws of a country you’re import to isn’t illegal. IF any firms are guilty of illegal practices I would suggest these are UK firms that have taken deliberate actions to take advantage of loopholes in UK laws: but do you see HMV(for example) being taken to court by the UK/EU for this? No; maybe the governments recognize it as wrong, but not illegal. The blame is still within the UK/EU; to say otherwise is just sensationalism/propaganda.
    3) There’s that ‘you’ again! Odd how people with vested interests seem to feel that anybody disagreeing with them must have a contrary vested interest, rather than just be impartial.
    If the EU & UK accept that the law is being broken, why do they not prosecute rather than amend the law? Could it be that they’re recognizing that the law is not being broken, just that the law is not fit for purpose?
    4) You’re right, you’re not trying to seek fairness in general, just tackling the ‘illegal’ practices of companies within the EU; which brings us back to the question of whether it’s right to blame Senator Ozouf specifically.

    The fact is that the only companies that are to blame for any damage done to independent retailers in the UK/EU, are UK/EU companies, that have taken advantage of poor governance; they’re also, in many cases, the same big high street names like Woolworths and HMV that are in trouble financially through poor management, and a difficult, changing, challenging market; specifically the move to e-commerce through website such as iTMS, based in Luxembourg to take advantage of low VAT rates!!

    • 1) Read back through the postings that hit this site early on if you want to see some ‘us and them’ comments. Also read through some of the Channel Islands parliamentary scrutiny documents for some more ‘us and them’ comments. We agree its unnecessary but people who throw stones…
      2) It doesn’t matter who does it, English, CI, or whoever but using LVCR for this purpose is contrary to EU law.
      3) Illegality. Let us just clarify this because we keep making this point but it doesn’t seem to register. Circular shipping itself is not illegal per se. LVCR is an optional relief for member states that is governed by certain rules. Member states can implement it but must not allow it to be used for avoidance that leads to market distortion. Failing to do this is a breach of EU Law for the member state not individual businesses. This offence is prosecuted but the difference here is that its illegal for the EU member state to allow it and they are policed by the EU. So yes the UK allowed it but they were in breach of EU law for allowing it. Because of that they must rectify the situation and prevent the avoidance and resultant distortion. In this case that is most likely to mean complete removal from the CI. The LVCR legislation is so clear on this fact a child could understand it.
      4) Your point that the CI are not responsible in any way because they took part but were not responsible for policing might well be arguable but it wouldn’t be easy.
      5) HMV, Music demand…not relevant.

      • Yes we have a vested interest here in the UK. A vested interest in ensuring the VAT laws we have to follow due to our membership of the EU are also properly applied to our borders something the UK has failed to do….and business based in the CI (no matter their nationality) have exploited. If we have to pay VAT make sure we don’t get nailed by it as well.

  6. MPW is another one on the deck of the Titanic pontificting about why it shouldn’t sink. Of course, arguing that black is white might just be a hobby for this person. Everyone knows it’s simply a racket that’s had its day. The smart money has moved on to the next one.

    • Ken, Where did I argue ‘black is white’? LVCR is not a racket; why do you think it is? And what do you mean about ‘smart money’?? Smart is usually a term used to denote a positive attribute, yet you refer to those taking part in what you view as a racket, something normally considered quite negative. Are you just not making your thoughts clearly, or are you not clear in your mind about the subject you’re commenting on?