RAVAS Pre-Budget Statement Regarding the UK’s Application of Low Value Consignment Relief
|March 20, 2011||Posted by RAVAS under VAT|
RAVAS is calling upon the government to act definitively to end the competitive distortion and loss of VAT caused by the exploitation of Low Value Consignment Relief (LVCR) via the Channel Islands.
RAVAS will not be satisfied by any tokenistic half-measures and believes that the government will have fulfilled its obligations only when it is possible for onshore UK retailers to compete on a totally level fiscal playing field with retailers with offshore facilities.
Retailers Against VAT Avoidance Schemes (RAVAS) is a pressure group of independent retailers fighting the practice of large retailers avoiding VAT by routing their products through the Channel Islands.
The large retailers are 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, but which could be as low as £10. 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, have been routing goods through the Channel Islands. In 2005 HMV opened a distribution centre and Guernsey, part of a stampede of major retailers to offshore facilities in an attempt to compete with Play.com the leading offshore mail order company.
Although LVCR is created by EU law, the EU Directive creating it also stipulates that it must not be allowed if it distorts competition or creates any evasion, avoidance, or abuse. Separate EU legislation also stipulates that “similar goods bear the same tax burden,” a condition clearly violated if goods routed through the Channel Islands are VAT-free while competing products that stay onshore are taxed.
In 2005 and 2006 The UK Government was given clear and overwhelming evidence by the Forum of Private Business (FPB) and a delegation of UK retailers that LVCR was being used for wholesale VAT avoidance and on an industrial scale, but it chose not to act.
After further pressure, HM Treasury officials opted to allow the Channel Islands to introduce a ‘licence scheme’. This was subsequently misrepresented as an end to The VAT Loophole, both in the 2007 UK Budget and by the States of Jersey. In reality the licence scheme was nothing other than a control over who could profit from this industry, rather than a control over trade volumes. Some companies that could not obtain licenses simply sold their operations to those that could. The license scheme hence did nothing to prevent the industry expanding and destroying UK mainland business for the remainder of the decade. CDs bought online increased their market share at a rate far disproportionate to the gains they were making before the opening of HMV’s Guernsey facility. If this had been the result of natural organic growth, it would have benefited the pure-online retailers of CDs based on the UK mainland; instead, almost all of the onshore pure-online music retailers, many of whom had previously been enjoying strong growth, went out of business, proving the huge market distortion created by the exploitation of LVCR and showing, moreover, that the demise of independent retailers was nothing to do with high-street stores’ market share being taken by online retailers, but everything to do with onshore retailers’ share being taken by offshore retailers purely because they were able to avoid VAT. Matt Moulding, CEO of thehut.com, a fast-growing provider of offshore fulfilment services, told the Guardian in March 2009: ““If you aren’t offshore you couldn’t possibly compete. Your cost price would be above what people would be retailing at.”
HMRC has not acted against this VAT avoidance, despite losing, by its own figures, somewhere between £130m and £160m per year. It has no sought advice from knowledgeable trade bodies representing independent music retailers, instead taking the advice from offshore tax consultants – i.e. those with a vested interest in seeing the trade continue – that the demise of independent music retailers is due to the shrinking of the CD market, music downloads, or supermarkets – notions entirely disproven by data – and that closing down the avoidance would cause HMRC to incur administrative costs in collecting the VAT. In reality, the only reason goods are routed through the Channel Islands is to avoid VAT, so if there is no fiscal advantage to offshore facilities, goods will not be routed through the Channel Islands, all the goods will remain onshore in the UK at all times and VAT will be collected in the normal way. Even though several companies in the music industry also sell books, this is exactly what happens with books, for which there is no fiscal advantage to offshore facilities because they are zero-rated for VAT in the UK. Moreover, even if some goods were still to arrive the Channel Islands, the islands have a unique Memorandum of Understanding with HMRC whereby VAT is pre-paid on account: so there would still be no extra administrative costs or time waiting to clear customs.
In response to these arguments, HMRC has recently claimed that administrative costs would still be incurred through ending the trade because the measures that would be taken to end it, such as making use of the allowed exemption of mail order goods from LVCR, would ensnare LVCR-eligible goods coming from territories other than the Channel Islands. VAT could be collected on these goods, but the administrative costs would be greater than the VAT. However, a senior figure in the postal industry has revealed to RAVAS that, in his estimate, 85% of LVCR loss is due to The Channel Islands and that, in his view, VAT losses are at least £200 million a year. Any measure to end the avoidance trade through the Channel Islands, then, would surely be hugely revenue-positive even if some goods from elsewhere were caught up in whatever measures were taken.
The case to end this avoidance is now overwhelming. It has caused a proven competitive distortion that has bankrupted several viable, job-creating British businesses. Closing it would bring in much-needed tax revenue.
Previous measures that were said to be attempting to control or limit this trade have been totally ineffective. 96% of online sales of CDs to the UK market emanate from the Channel Islands. This figure alone is evidence that half-measures simply do not work. For this reason, RAVAS is releasing the following statement regarding any measures taken in the Budget against the exploitation of LVCR via the Channel Islands:
RAVAS will not be satisfied until HM Treasury takes definitive action and introduces a measure to prevent LVCR being used by any company, in any way, to gain a distortive price advantage over VAT-paying competitors in the UK. The application of LVCR must not be contrary to the intentions of Directives 2006/112/EEC and 1983/181/EEC: namely that equivalent goods must bear the same tax burden, that relief can be granted only on the condition that it is not liable to affect the conditions of competition on the home market, and that any evasion, avoidance, or abuse must be prevented.
If a company’s sole reason for maintaining facilities on the Channel Islands is to avoid VAT – such as if the overwhelming majority of its sales are in the UK but it remains a Channel Islands company for no apparent commercial reason – this should be considered avoidance.
The test for whether sufficient action has been taken is as follows: is it possible for businesses that do not have offshore facilities to compete, on an equal basis regarding the VAT that they must charge, with those that do?
In 2006 an EU ruling was made that prevented duty free alcohol and tobacco from being sent into the UK through offshore internet retail outlets in order to severely undercut duty inclusive retail. There is no reason that the similar practice of VAT free mail order cannot also be prevented
Richard Allen – Spokesperson for Retailers Against VAT Avoidance Schemes