Share this content
AIA

Call to close Channel Islands VAT loophole

by
13th Dec 2010
Share this content

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.

Replies (9)

Please login or register to join the discussion.

avatar
By frustratedwithhmrc
14th Dec 2010 22:03

LVCR

Low Value Consignment Relief is governed by the EU Council Directive 2009/132/EC, however it seems to me that the abuse that is taking place is related to the sourcing of non-Channel Islands products from elsewhere undercuting the UK market due to the difference between VAT-able items in the UK and LVCR VAT exempt items from the Channel Islands.

The vast majority of the products we are talking about are purchased from the same source as UK supplies and then fed into the UK market without the additional VAT that UK sourced supplies are subject to.

The obvious counter to this abuse (and it is abuse) is to say that LVCR related supplies between the Channel Islands and the UK will only cover locally produced goods to the value of 18 Pounds Sterling (22 Euros equivelent).

That would stop the majority of abuse in relation to Music CD's and Video DVD's.

 

Thanks (0)
avatar
By Trevor Scott
15th Dec 2010 18:51

In such a scenario,

what would be "local" and how could this be enforced within the single economic area being the European Community?

Addition

I've just checked with a younger member of the family and they've confirmed and shown me places on the internet where you can get any movie, music track or computer game for free, therefore why do so many people pay? Are we a nation of honest souls?

Thanks (0)
avatar
By chris81
15th Dec 2010 20:36

LVCR

The standard response from the Treasury is that nothing can be done to prevent Channel Island companies from taking advantage of LVCR however many would argue that LVCR Abuse is the main problem rather than LVCR itself.  Fortunately there are many things that the government can do immediately to restrict the revenue lost to LCVR and prevent altogether what many would term as 'abuse' that is hurting so many mainland based companies that either don't have the ability or the desire to relocate to the Channel Islands.

For further reading I would recommend the following resource:

http://www.vatloophole.co.uk/what-can-be-done/

Thanks (0)
avatar
By Trevor Scott
16th Dec 2010 10:44

If

they are acting within the law then they cannot be abusing anything. If the management of some companies wish to make themselves uncompetitive then that is a matter for their shareholders. I'm not being obtuse, just realistic.

As an individual it is my view that the problem is government, decades of inept civil servants and politicians more interested in their place in history or own expenses rather than protecting and promoting the UK. The result is a number of legislative farces which screw up peoples lives. 

Thanks (0)
avatar
By frustratedwithhmrc
16th Dec 2010 11:23

I accept that what they are doing is within the law

However, something can be both legal tax avoidance (not evasion), but still be abused.

The reason that Low Value Consignment Relief and the VAT pre-payment scheme came into place was the fear that parcels of perishable products (flowers, Jersey cream, etc.) would be held up by customs after the introduction of VAT in 1973. On this basis the relief seems reasonable and arguable and if this was the scope of LVCR today then I don't believe there would be any controversy.

However, the fact is that since the introduction of LVCR, the scope of items being shipped has widened from imported / exported dutch tulip bulbs to CD's, DVD's and other items. When two businesses operating in the same marketplace aren't subject to the same level of taxation, especially where that gap is widening from 17.5% to 20% in January, then I would describe that as being abused.

In fairness to the Channel Island states, they have tried to constrain some of the worst excesses by ensuring that only those who are operating 'genuine' CI businesses (rather than just re-exporting import) can be established there, but this is obviously difficult.

It seems to me that an agreement that the scope of LVCR should be reduced to only the items for which it was intended (remember the argument about 'the intention of parliament'?), namely perishable goods sourced from the islands. This need not be unduly onerous on the Channel Islands themselves and is better than the complete withdrawal of the relief.

I am not a fan of high taxes and UK taxes are at a level that is impeding growth, however I am also not a fan of an uneven playing field and in certain areas of internet-based low value mail order goods, LVCR is creating a distortion and providing a significant market advantage over an equivelent UK-based company.

I'm a free market capitalist and generally against certain types of taxation, but VAT is a better way of collecting tax than others, however it MUST be evenly applied.

Thanks (0)
avatar
By Trevor Scott
16th Dec 2010 15:51

...
The reality is that there are two markets, not one, and there is a level playing field for any company wishing to live in the reality of the two markets.As a point of principle, complying with the law cannot be an abuse.The law is as written, not what it doesn’t say or supposedly what someone may have wanted it to say. This isn’t a case of misinterpretation, it’s a fault of legislators.Customs and importers should work together to resolve any special difficulties, not seek to legislate in such terms as LVCR which should be scrapped as a pointless concession; especially  in this day and age.

Thanks (0)
avatar
By chris81
16th Dec 2010 22:05

LVCR

In response to Trevor, I think we just differ on the definition of the word abuse in this context.  Many of us aren't saying that the sale of flowers, cream and the such from Jersey to the UK mainland is an 'abuse' of LVCR. 

The abuse comes as 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.  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 could be seen as an abuse.

Thanks (0)
avatar
By Trevor Scott
18th Dec 2010 08:58

Scrap the LVCR to form one common market

Prove it, first...objectively...then you may call it abuse.

You claim that "The LVCR Directive was not drafted to give retailers a VAT advantage in the internal EU market.", yet the reality is that legislators did write the LVCR directive to give retailers a VAT advantage in the internal EU market and therefore they created two markets to form one level playing field for any law abiding companies who have to survive in the reality of the corrupted concept that is a "single double market"; or should that be "double-dutch market"?

The problem is the legislators. The law should be internally consistent, legislators should stop tinkering with laws which are inevitably corrupted from the known original intent whch was to create one single common market.

Thanks (0)
avatar
By Simon Sweetman
31st Dec 2010 16:20

abuse ?

What of course this does do is further disadvantage small business. Independent UK record / CD shops are going under and part of the explanation is that they cannot afford this kind of malarkey. Tax avoidance or the availability thereof is one of the reasons that the UK's retail sector is being homogenised, and it very much seems to me like unfair competition. 

Thanks (0)