RAVAS, the group of UK retailers that successfully campaigned to convince the Government to end the VAT avoidance arrangement known as ‘The Channel Islands VAT Loophole’, has intervened in the judicial review of the UK Governments legislation that ends the loophole. The judicial review has been initiated by the Governments of Jersey and Guernsey who claim that the legislation is discriminatory and illegal.
The VAT Loophole, which enabled companies who could route their operations via the Channel islands to avoid charging VAT and hence undercut onshore competitors, was responsible for the rapid rise of Play.com, who first introduced the concept of VAT free mail order and free delivery on CDs and DVDs. Unsurprisingly this popular marketing ploy helped Play.com grow into a multi-million pound online retailer within five years. It also encouraged a boom in similar mail order operations who sell everything from health supplements, cosmetics, contact lenses, computer memory cards, ink cartridges, car parts, plants and flowers..
The import VAT relief at the centre of the argument is called Low Value Consignment Relief (LVCR) and was introduced in 1984 for the purposes of minimising administration costs for member states. It exempts from VAT any import from outside the EU below a threshold value and since the Channel Islands are outside the EU for VAT purposes they have been able to take advantage of it. LVCR was however, never intended to be used as a source of competitive advantage and companies exploiting it in this way are abusing it.
LVCR abuse involves exporting goods to The Channel Islands in order to re-import them to UK customers VAT free, a behaviour that is known as ‘circular shipping’. Where customers have placed a single order for multiple items they receive them in individual packets so as to gain VAT relief from LVCR. Critics point out the massive carbon footprint created by this industry with excess packaging and pointless extra journeys.
Some mail order sectors are now dominated by the Channel Islands with the majority of new CDs bought online sold through the Channel Islands. Despite the overall decline in music sales, online sales of CDs increased by 40% between 2005 and 2009 yet nearly all the pure-online music retailers on the UK mainland have gone out of business unable to compete with VAT free retailers.
Following a successful complaint by RAVAS to the European Commission and in accordance with the coalition Government’s pledge to tackle tax avoidance, Chancellor George Osborne announced an end to the Channel Islands’ use of LVCR in the 2011 Budget. In November of 2011 after discussions with the EU the UK Government announced that LVCR from the Channel Islands would 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”.
In response The Channel Islands have initiated a judicial review of the new legislation claiming that it is illegal and discriminates against the Islands. RAVAS maintains that the UK’s change is entirely lawful and that it has been enacted in order to specifically deal with the overwhelming abuse of this import VAT relief, an abuse that is specific to the Islands, making the action entirely proportionate.
Spokesperson Richard Allen explained the reason for the intervention “Although we had effectively ended our campaign it was clear that powerful commercial interests were involved in the Channel Islands challenge to the UKs LVCR legislation. We felt that we could not remain silent if those commercial interests were going to be closely involved with the move. The LVCR trade is a complex area of law and commerce and clearly HMRC need assistance from businesses that not only understand how it works but whom also understand at first hand the insidious distortionary effects of this VAT abuse. The long term and blatant abuse has destroyed many UK businesses that other than for the lack of a 20% trading advantage would have been viable healthy operations giving people jobs and generating tax revenue in the UK. Whilst we of course have sympathy for the effect on employment in the Channel Islands that the closure of this industry will have, it is for the people of the Islands to strongly question their elected representatives as to how they could possibly allow an industry that was based on the abuse of tax to become so important to the Islands economy. Not only did a report commissioned by the Jersey Government in 2005 outline that LVCR was the only reason that the fulfilment industry existed on the Islands but it also warned that the tax exemption that was being exploited was controlled by the UK and could be removed at any time. Now companies are closing up shop they cannot claim their trade was not entirely reliant on LVCR”
The hearing takes place in London on the 13th to the 15th of March at the Administrative Court in The Strand. It is hoped that a precedent will be established that rules that LVCR’s use for VAT free mail order is abusive.
-ENDS-
NOTES TO EDITORS
- 1. Reference :
What Is The Contribution of The Fulfilment Industry to Jerseys’ Economy? – An Economic Growth Plan Sectoral Study – Report Prepared for the States of Jersey April 12th 2005
1.1.2 Why does the Industry Locate in Jersey ?
“The Principle reason for the industry to locate in Jersey is that goods of relatively low value such as CDS and DVDs are exempt from VAT levies on the purchaser when shipped from Jersey to the UK ….. hence the location of the fulfillment industry in Jersey depends on making use of an opportunity of tax arbitrage…If the LVCR were to be abolished and the UK were to levy UK VAT on the goods the companies may leave Jersey altogether since the possible gains from the tax arbitrage would be lost”
3.4 – Competition from Other Jurisdictions and Abolition of the LVCR
“A number of companies stated that the association of some third party fulfillment service providers with high-profile UK based companies raised the profile of the industry. The increased attention by the media and EU Governments and the future growth of the worldwide fulfillment industry may thus increase the risk of a withdrawal of the scheme”
5 – Summary and Conclusion –
“The most significant concern of the fulfilment industry is that the LVCR threshold may be reduced or removed altogether “
RAVAS is an independent pressure group of UK retailers that has successfully fought to end the exploitation of LVCR via the Channel Islands.
