The United Kingdom is a member of the European Union and as such has an obligation to charge VAT on a range of goods.  There are three different categories for VAT; standard rate at 17.5% (rising to 20% in January 2011), reduced rate at 5% for goods considered to be socially or economically important (domestic fuel and power for example) and zero rate for goods and services deemed to be ‘essential’ such as children’s clothes, basic foodstuffs and books.

The Channel Islands which consist of the islands Jersey and Guernsey are self-governing, not part of the EU however are part of the customs territory of the Union meaning that they do not charge VAT on purchases but maintain a free movement of goods between the Islands and the rest of the EU.

When goods are imported into the UK from a non-EU territory, such as the Channel Islands they may be subject to Customs Duty, Excise Duty and VAT however a form of relief known as Low Value Consignment Relief (LVCR) allows a member state to choose to ignore the VAT on goods that fall below a specific price threshold if it decides that collecting the VAT on these goods would be impractical.  Allowing the relief is also optional.  The UK has opted to allow the relief and set the threshold to £18 which equates to the maximum level the EU allows.

Historically  The Channel Islands have always had advantageous customs arrangements to help their horticultural industry send goods such as flowers and dairy products in to the UK rapidly as they suffer from decay if there are delays at customs. Retailers in the Channel Islands can pre pay VAT to UK Customs thereby avoiding any inconvenience to UK customers or UK customs. When LVCR came into force in 1983 the Islands gained the double advantage of rapid transit through Customs of vatable packages as well as the VAT advantage afforded by LVCR.  Increasingly over the last decade  the competitive advantage offered by this VAT relief has been used by a wide range of different companies that are using the Channel Islands close proximity to the UK mainland to offer their goods to UK consumers without having to charge VAT.

While the problem could theoretically affect any EU country, it especially affects the UK Mainland as we hold a common currency, are in close proximity and the postal service charge no extra for shipping from Jersey or Guernsey (in fact they get cheaper rates). Additionally because the Channel Islands are effectively within the UK sales territory and not in another country  Channel Islands retailers are able to offer products that are licenced only for sale in the UK.  This is an important advantage as without it they would be unable to obtain UK licenced products and then offer them VAT free in the UK.  More importantly the combination of LVCR and the pre paid VAT schemes mean that all goods enter the UK postal system rapidly, whether they are less than £18 or more than £18.  Ordinarily any goods over £18 entering the EU would experience customs delays and handling charges  so selling items that attracted VAT would not be viable because of this.  Interestingly the VAT Pre Paid Schemes  are not EU arrangements and could be withdrawn by the UK at any time or more importantly could be used to collect VAT at no extra cost to HMRC if the LVCR threshold was reduced.

Over the last decade these factors have resulted in the offshore industry experiencing rapid growth with fulfilment companies being set-up in the Bailiwicks with the sole intention of providing an avenue for UK based companies to provide their customers with an easy method of re-importing UK/EU manufactured goods in to the country VAT free.

The success of this industry doesn’t appear to be showing any signs of slowing down and due to the favourable tax conditions, companies that have moved to Jersey or Guernsey have typically experienced rapid growth, as demonstrated by the  explosion in the size of Play.com, the highly successful transfer of HMV’s online operation from the UK to Guernsey in 2005, and the continued success of TheHutgroup.com who also run sites in Guernsey for Tesco, Asda, Dixons, Argos and others..