We believe that exporting goods to a location outside the EU which exists for no reason other than to reimport goods back into the EU VAT free through the operation of LVCR is an abuse of LVCR . In our view this Abuse is leading to tax avoidance on a huge scale and creating a major market distortion in internet retail in the UK. Whilst it is currently legal to operate a compliant avoidance scheme to take advantage of LVCR we believe that the UK’s failure to use it’s discretion under the LVCR directive to exclude mail order goods has created a major market distortion that puts it in breach of EU law. It is our opinion (based upon legal advice) that circular shipping of UK/EU goods via a non EU location to gain LVCR relief is an abuse of LVCR. We call upon the UK government and the European Union to challenge such arrangements and clarify whether or not they are abusive.
Those affected by tax free imports from the Channel Islands are not specifically troubled by the existence of Low Value Consignment Relief (LVCR) as much as the apparent abuse of a system originally designed to allow genuine non EU imports to enter the EU/UK VAT free. Ordinarily only non-EU goods would benefit from the operation of LVCR.
LVCR is mainly applied in The Channel Islands to goods that have been deliberately exported to the Channel Islands from the EU in bulk so that they can be reimported individually back in to the EU in order that the retailer can take advantage of the VAT relief. We believe that this practice is an abuse of the EU tax system in that its essential aim is to gain tax relief contra to the intent of European Directives covering LVCR. The LVCR Directive was not drafted to give retailers a VAT advantage in the internal EU market.
In the 2006 a major European VAT abuse Judgement won by HMRC and called Halifax, defined VAT abuse as transactions that :
“notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”
In other words if the main purpose of carrying out a transaction is to gain a tax relief and if that transaction results in a tax relief that is contrary to the intention of the legislation surrounding that tax relief, then that transaction is an abuse.
The UK is legally obligated to prevent abuse of LVCR and any resultant tax avoidance and market distortion yet has failed entirely to take any action to stop the blatant export and reimport of UK goods via the Channel Islands to gain VAT relief through LVCR.
LVCR legislation is not intended to grant VAT relief to goods in the EU that have been deliberately exported from the EU in order to gain the relief. In the case of LVCR and the Channel Islands it is clear that goods are being exported to the Islands in order to gain the VAT relief on reimport via LVCR. The way that LVCR is being exploited via The Channel Islands is therefore in our view abusive.
SO WHAT DOES THIS MEAN ?
Under the directive covering LVCR goods that are deemed abusive do not qualify for the relief. This would mean that companies that were previously avoiding VAT by exporting goods from the UK or EU in order to benefit from LVCR may well be liable for VAT, and under the Halifax ruling that would be retrospective. In our view the proper application of LVCR is to exclude goods that have been deliberately exported from the UK/EU. That would stop the avoidance of VAT and distortions of competition that have been destroying UK mainland retail.
NOTE TO CHANNEL ISLAND RETAILERS
This website has received some fairly angry emails from Channel Island retailers stating that the fact they have been allowed to continue exploiting LVCR indicates it must be a legal practice, and our website is scaremongering. Our high quality legal advice clearly indicates that, for the reasons previously stated, the practice of circular shipping goods via a non EU location to exploit LVCR is not legal under EU law. We would however totally agree that if retailers have been allowed to continue trading in this manner by the UK authorities, they can’t be held entirely responsible particularly if they have been forced to locate offshore in order to remain competitive in a hugely distorted market that’s resulted from their negligent inaction. That is an issue that individual retailers would have to take up with the UK Authorities and the EU Commission if the practice is confirmed abusive. If you have concerns about this issue please contact us via the contact form in the ‘What Can Be Done ? ‘ section of this site .