Guernsey Retailers Threaten Legal Challenge to UK’s ‘Discriminatory’ Removal of LVCR

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 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.

Channel Island VAT Loophole Finally Closes

RAVAS, welcomes the Coalition Government’s action to remove the European import relief that underpins the VAT avoidance arrangement known as ‘The VAT Loophole’. The Channel Islands mail order industry has been enjoying an unfair advantage for many years, an advantage reliant upon the avoidance of VAT that has been facilitated by the exploitation of an obscure European VAT import relief called Low Value Consignment Relief.

Following a successful RAVAS complaint to the European Commission, Chancellor George Osborne backed up the Coalition Governments’ commitment to end the Channel Island abuse of LVCR in the 2011 Budget. He announced an initial drop in the LVCR threshold from £18 to £15 as of November 1st this year and indicated that further discussions would take place with the EU so that LVCR “can no longer be exploited for a purpose for which it was not intended”. Those discussions led to the announcement today that LVCR from the Channel Islands will be scrapped completely as of the 1st of April 2012 in order to “bring increased fairness for UK businesses, benefit the UK economy and protect millions of pounds in tax revenue” .

LVCR exempts goods from VAT if their value falls below the LVCR threshold when they are imported into the UK from outside the EU and is intended to relieve the need for member states to collect small amounts of VAT when the cost of collection exceeds the amount due. The Channel Islands are close to the UK mainland yet are outside the EU for VAT purposes, however their location and VAT status were not considered as a potential source of VAT avoidance when the UK Government applied LVCR to Channel Island imports in 1983. As a result an industry has developed on the Islands which encourages the importation of UK and EU goods so they can be sold back into the UK by mail order, VAT free.

This significant trading advantage was initially exploited by the horticultural industry who import into the islands most of the flowers and plants that are exported to the UK by mail order. In the mid 1990’s ‘The VAT Loophole’ attracted other sectors including ink cartridges and contact lenses. It was however CD and DVD mail order which brought the avoidance scheme to public attention and the first decade of this century saw the rise of the VAT Free Channel Islands entertainment retailer, pioneered by

This round tripping mail order industry in an unlikely location, whilst popular with consumers, has destroyed or damaged scores of viable job-creating businesses on the UK mainland. It has also generated vast amounts of unnecessary extra packaging and carbon dioxide and cost the taxpayer at least a billion pounds in lost VAT in the last decade.

In contrast to the offshore growth in online music mail order, UK mainland music retailers have been unable to take advantage and have been pushed out of the marketplace by the unassailable VAT advantage afforded those able to establish a Channel Island base.

The market distortion that has resulted has not only contributed to the loss of high street music retail brands including Fopp, Zavvi, MVC but has also destroyed hundreds of independent retailers, and wiped out virtually all mainland internet music retail. Over 90% of mail order music retail is now based offshore.

While some observers have claimed that the general fall in music sales and music downloads is responsible for the demise of UK retail the truth is that downloads remain peripheral to the albums market. In 2008, music retailers were closing at a rate three times faster than the fall in music sales. Conversely offshore ‘hard format’ CD retailers avoiding VAT were growing at rates greater than 100% year on year.

Similarly many other mail order sectors including memory cards and electronic goods, cosmetics, gifts, computer games and car spares have fallen under the spell of the VAT Loophole which has lured customers offshore at the expense of UK mainland retail both online and on the already struggling high street.

Richard Allen who has been campaigning on the issue since 2005, before joining RAVAS as their spokesperson in 2009, commented on the Government’s action: “The removal of this major market distortion should be welcomed by all UK businesses that wish to trade online. The VAT Loophole is not only contra to the basic principles of EU VAT law but is also contra to any sense of fair play and a ‘moral market’. Although we welcome competition based on price and service, a scheme that abuses tax legislation in order to promote damaging and predatory competitive behaviour should never have been allowed to develop. We hope that the UK Government and EU will now remain vigilant and ready to close down any similar schemes should they develop in other locations. The Channel Island’s VAT loophole has over many years destroyed livelihoods and caused much misery in the UK business community. We are of course sympathetic to those Channel Island employees who may lose their jobs as a result of the ending of this industry but we think it is entirely disingenuous for commentators to blame the loss of that employment on those attempting to correct what is clearly an unacceptable, unsustainable and damaging abuse of the tax system”

LVCR drops to £15 but there are more changes to come….

Today LVCR dropped to £15 from £18 from all non-EU destinations into the UK. However this measure is not the end of the story, as some commentators have suggested. Firstly anyone in offshore mail order will know that whilst a drop to £15 is an inconvenience it still allows most products to enter the UK VAT free particularly if you add in a postage and packing charge.  Nobody really thinks that lowering LVCR is going to have a huge affect on the ongoing abuse of LVCR and in particular the industrial circular shipping operations currently utilising the Channel Islands.  Secondly the 2011 budget notes make it very clear that dropping LVCR to £15 is not the only measure that the UK intends to introduce  and that “the Government will also explore options with the European Commission to limit the scope of the relief so that it can no longer be exploited for a purpose for which it was not intended“.

A member of RAVAS recently complained to HMRC and received a letter which stated “ministers have considerable sympathy with the points you make. The Government’s view is that LVCR is currently being exploited…. and it adversely affects UK companies who find it hard to compete with companies who do not have to charge VAT…..the Government is determined to put a stop to this situation

It is now clear that both the EU and the UK are serious about ending LVCR abuse.

RAVAS believes that under the guidance of the European Commission further measures to prevent the abuse of LVCR have already been formulated  and that these will be announced imminently.  

6th of December 2011 could see Final LVCR Announcement as Jersey Minister Accepts Concept of Level Playing Field

Jersey Treasury Minister Phillip Ozouf has commented on the impending further changes to LVCR  which are expected to be announced in George Osborne’s pre budget statement on the 6th of December 2011.  Stating to the BBC politics show that the Island needs to “ be building businesses which benefit Jersey but are also not harmful to the UK”  he made comments starkly at odds with his previous whole hearted support for the expansion of the LVCR based fulfilment industry.  During his tenure as Minister for Economic Development between 2005 and 2008 he introduced a policy for this fulfilment industry “to allow online retailing as whole to expand in the Island” creating many new jobs for Island residents on the back of a “kink in the tax system“. Given that the removal of the kink was always inevitable reliance on it would appear to have been unsustainable.

Similarly the LVCR trade has also caused problems in the UK due to the failure of then Chancellor of The Exchequer Gordon Brown to prevent the industrial VAT avoidance that resulted.  Despite being made aware of the problem in the late 1990s by UK businesses who complained to the Treasury, the Labour Government continued to turn a blind eye allowing the Channel Islands to self regulate what was essentially a major abuse of an EU import relief. The growth of the abuse of LVCR has destroyed many UK businesses and cost UK jobs.

The change of heart by the Channel Islands and the expected decisive action of George Osborne is  welcome,  giving all traders the hope that a major distortion in the on-line marketplace will finally be removed, allowing retailers to trade on a level playing field and businesses to be built on firm foundations rather than ones based on tax avoidance.

All we ever wanted was a level playing field. 

NOTE : The statement in the Channel Island TV report below that LVCR was introduced to help the Flower Industry is factually incorrect.  The pre-paid VAT  collection scheme was introduced to help the flower industry in 1973 allowing Channel Island retailers to prepay VAT and avoid customs delays.  LVCR was introduced  in 1983 and applied to all imports into the UK, not just those from The Channel Islands. Over time the two have become confused.

Major LVCR Retailers Sell Up as UK Government Prepares to Deal Final Blow to LVCR Abuse.

A recent article in the Mail On Sunday confirmed that the drop in LVCR to £15 is far from the final measures that the UK Government intends to introduce to combat the abuse of LVCR.  The sudden sale of for a relatively small amount of money, the sale of the failure of to float and the stalled sales of both Thompson and Morgan and Healthspan all appear to point towards something on the horizon that may have an effect on LVCR traders.

Since RAVAS successfully complained to the European Commission about the UK Governments failure to prevent the abuse of  LVCR  and the resultant tax avoidance, we are confident that ultimately action will be taken to close down this abuse completely.