With the festive shopping season in full swing, the government is under increasing pressure to clamp down on Channel Islands VAT avoidance in the New Year.
The current Low Value Consignment Relief (LVCR) lets retailers import goods worth up to £18 into the UK VAT-free. As a result every major music retailer now sells CDs and DVDs online using offshore centres.
Industry pressure and the rise in taxpayer protests have flagged up the perfectly legal avoidance technique as ripe for repeal and prompted the Treasury to tell The Guardian it was "actively reviewing" LVCR as part of the wider simplification of the UK tax system. This steer should probably be taken with a pinch of salt, since a Treasury's report on the interim findings of the Office of Tax Simplification concludes that VAT reliefs will not be reviewed in the first wave of reform because of the particularly complex interactions between EU law and UK political commitments.
The issue is set to become even more heated when offshore retailers will gain an even bigger advantage over the high street when VAT goes up to 20% on 4 January.
David Ingall, partner at JWPCreers said: “This is an issue that should be tackled and quickly. Defeating a VAT rate of 17.5% is one thing but once the rate gets to 20% that will be a further loss to the government. I am sure that there will be a mechanism to overcome the problem.”
Closing the Channel Islands VAT loophole will cut out a large amount of business for Royal Mail and the wider UK economy, but will return funds to Treasury and could result in shoppers returning to the high street. Independent record shops in particular have suffered in recent years.
Nick Forsyth, partner at Lambert Chapman, said: “This sort of practice should be stopped. Whilst it initially appears good for the consumer, it deprives the exchequer of much-needed funds and ultimately leads to pressure on the VAT rate increasing.”
The Forum of Private Business (FPB) has also weighed in pointing out that government plans to clamp down on tax avoidance have missed out on the Channel Islands VAT loophole costing the Treasury hundreds of millions of pounds per year. In January, the forum will submit evidence on the loophole to the Treasury Select Committee as part of its inquiry into the fundamental principles of tax policy.