The group of retailers, campaigning against an industrial-scale offshore VAT avoidance scheme that has destroyed or damaged scores of viable job-creating businesses and cost the taxpayer many hundreds of millions of pounds, has cautiously welcomed the Government’s statement in the budget that it intends to act to to curb the abuse of Low Value Consignment Relief from The Channel Islands, but calls for urgent and meaningful action to follow words.
Chancellor George Osborne announced in the Budget that the government intends to work with the European Commission to explore ways to end the exploitation of Low Value Consignment Relief (LVCR) for a purpose contrary to its intentions. Retailers Against VAT Avoidance Schemes (RAVAS) is calling on the government to follow through on this promise as quickly as possible to prevent further damage to the UK retail sector.
The official loss of VAT through LVCR is £130m yet a recent reply to a Freedom of Information request from Channel 4 News resulted in HM Revenue and Customs stating that the figure for the year to the end of June 2010 is in fact £140m, rising to £155m for 2011. Insiders within the offshore fulfilment industry estimate the loss at closer to £200 million with the bulk of it due to the Channel Islands LVCR industry.
The market distortion that has resulted from the abuse of LVCR has seen the loss of most high street music retail brands including Fopp, Zavvi MVC and hundreds of independent retailers along with virtually all mainland internet retail. Over 90% of mail order music retail is now based offshore. Whilst some observers have claimed that the general fall in music sales and music downloads is responsible for the demise of UK retail, downloads remain peripheral to the albums market and 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.
RAVAS have pointed out that this kind of abusive market distortion is a threat to all mail order in the UK just not music.
The Chancellor also pledged to reduce the LVCR threshold to £15, though this will have no effect on the music industry as most CDs already sell for well below this.
RAVAS Spokesperson Richard Allen commented on the Governments action ““We have been telling HMRC about this for years already,” said Allen. “I hope that they come to a conclusion quickly about what they are going to do about it. Many UK retailers might not survive another year of this. Whilst the LVCR threshold that allows goods to enter the UK VAT free will be reduced from £18 to £15, this really isn’t going to have much immediate relief for those retailers suffering the daily reality of a distorted internet retail market. However, they certainly won’t be opening bottles of Champagne in the offshore fulfilment industry either as it appears the days of this arrangement are numbered. We maintain a strong dialogue with the European Commission on this issue and we will be monitoring developments closely. There remains a significant amount of avoidance and market distortion caused by the UKs application of LVCR and its failure to prevent it being abused”
Retailers Against VAT Avoidance Schemes (RAVAS) is a UK pressure group of independent retailers that has fought to end the practice of large retailers avoiding VAT by routing their products through the Channel Islands. The large retailers have been able to do this because of Low Value Consignment Relief (LVCR), a relief created by Directive 1983/181/EEC that exempts from VAT any exports below a certain threshold value, which the UK government has set at £18 since it was introduced in 1983. In the last decade the use of the relief has mushroomed to an industrial level with all major online brands, and most major high street brands having an arrangement to supply goods VAT free from The Channel Islands. The original purpose of LVCR was to expedite the processing though Customs of perishable goods and to save the administrative costs of collecting small amounts of VAT.
The Channel Islands are outside the EU. Hence since the turn of the century and the advent of Internet retail, large retailers of especially CDs and DVDs, but now increasingly other products such as memory cards and ink cartridges, gifts, car parts and other mail order goods intended for consumption in the UK have been routing goods through the Channel Islands. In 2005 HMV, one of the major players in the UK music industry opened a distribution centre on Guernsey, part of a stampede of major retailers to offshore facilities in an attempt to compete with HMV and the then market leader in offshore Channel Island mail order Play.com. They have hence been able to undercut onshore UK music retailers by avoiding in a manner totally contrary to the intention of the LVCR Directive. Recently a senior customs official stated to RAVAS that “the relief and the special VAT position of the Channel Islands were never intended to be exploited in this way to supply goods VAT free to UK consumers”. Both high street chains such as Zavvi and Fopp and purely online players such as Delerium Mail Order, went out of business.
Richard Allen, long term campaigner on this issue and founder member of RAVAS stated that
“The argument is often used by those who profit from this arrangement that the scheme is good for the consumer because it allows them buy goods cheaper. I would question how a handful of powerful online retailers with a tax advantage offshore is preferable to a diverse competitive market place on the UK mainland, and point out that a truly fair VAT advantage would have to apply to both onshore and offshore retail and be available to all consumers. Why should consumers of goods routed offshore receive special treatment? VAT is levied to provide revenue for the government and should be levied equally on all non-necessity products. This scheme deprives the government of over £130m a year in VAT, a sum that it has to recover from other taxes. That’s before we start talking about lost corporation tax and PAYE from the companies that have gone out of business and the effect on the economy of distorting competition. The exploitation of LVCR in this manner contrary to its purpose is effectively an unjust redistribution from the rest of the economy to producers and consumers of goods routed offshore”
“At the end of the day even my 11-year-old daughter can see why a 20% price disadvantage is fatal. No amount of explanation or discussion will justify it. It’s just plain wrong.”