As any UK mail order company will know VAT must be charged on both the postage and the value of the goods if an item is sent from the UK to a UK (EU) customer. However correspondence we have seen between a member of RAVAS and HMRC has confirmed that whilst only the value of the goods is taken into account when calculating the LVCR VAT free allowance, import VAT is also not charged on the postage. This means that in theory a Channel Island retailer can charge £17.99 (the maximum LVCR allowance) plus a postage and packing charge of say £3.76 for an item making a total of £21.75 VAT free. In reality of course it is not really costing the Channel Island retailer £3.76 in postage and packing charges and this inflated amount just allows the retailer to abuse the system and avoid further VAT by hiding part of the profit as postage and packing. According to HMRC this practice is known as ‘value shifting’ and business operating within the pre-paid VAT scheme have to supply HMRC with a breakdown of how their postage and packing value is arrived at. Businesses outside the scheme, and whose goods are cleared by Customs at the postal Offices of Exchange are apparently ‘subject to risk based checks including consideration of the postage and packing declared’ . In practice of course due to the volume of LVCR trade, the fact that it is easy to come up with believable postage and packing charges this ‘simple on paper yet complex in reality’ system is being abused.
We know of a company that is sending out items individually with a value of up to £17.99 and charging £3.76 P&P per item. According to Jersey Post the cost of delivery to the UK for one of these items would be £1.60 which minus a jiffy bag at 16p, leaves a further £2 for packaging charges which equates to 20 minutes on the minimum wage to put it in the jiffy bag (three jiffy bags an hour). The total amount of P & P is obviously extortionate. Furthermore we know that the profit on the actual item being sold (after P&P but before other costs) is as little as 80p which makes no economic sense as there is not the sales volume in this product to justify such a low margin. The reality is that the profit margin exists within the bogus P&P charge which has also increased the amount of VAT being avoided.
HMRC have said to our member that if he discovers ‘any specific evidence of value-shifting’ he should ‘inform United Kingdom Border Agency through the appropriate channels’ but rather than do their job for them we thought we’d put the information here for everyone to look at, then they might do something about it.
May we also suggest to HMRC that closing down the abuse of LVCR would solve this issue and might also stop an abuse that is literally eating UK small businesses alive.