End Channel Islands VAT avoidance for good and plough money into boosting community investment, urges business group
  21 March 2011    
Bookmark and Share
 
 
   
  Email article : Print article : More articles like this
The Forum of Private Business is urging the Government to close the Channel Islands VAT loophole once and for all in next week's Budget - not repeat mistakes made in 2005 and 2008 when a much-lauded licensing scheme and ‘code of conduct' failed to solve the problem.
 

In 2005, a Jersey licensing scheme was launched and subsequently heralded as ending the abuse of Low Value Consignment Relief (LVCR), which the Government says costs the Treasury at least £130 million per year in lost tax revenue. In 2008, a Guernsey Code of Conduct was established.

In reality, neither scheme has prevented the large-scale VAT avoidance by large companies, at the expense of their smaller competitors. Both failed to limit the volume of goods being sold VAT-free into the UK.

In order to begin to reverse the devastation that has been caused to the UK's high streets as a result of large retailers exploiting the VAT loophole, the Forum has written to the Chancellor, George Osborne, urging him to plough some of the additional tax revenue that would be earned by closing the loophole into Community Investment Tax Relief (CITR), which encourages private investment into Community Development Finance Institutions (CDFIs).

Since 2003, CITR has helped raise almost £70 million in affordable credit for businesses and social enterprises. The scheme's state aid exemption ends in 2012, meaning that, unless it is renewed, under EU laws limiting public financial support for the private sector, the tax relief available will be severely curtailed.
 
Phil Orford, the Forum's Chief Executive, said: "There have been indications that the 2011 Budget will finally tackle the widespread VAT avoidance carried out by large, Channel Islands-based retailers, which devastates high street shops and smaller online retailers, but any measures must genuinely end this anti-competitive tax abuse and not just create a smokescreen of the kind we saw with the Jersey license policy of 2005, and later Guernsey's non-binding code of conduct.

"What better way to begin reversing the damage caused to our high streets by this long-standing practice than to use the additional tax revenue to support Community Investment Tax Relief, and encourage investment in businesses and social enterprises in these same communities?"

Mr Orford added: "There would, of course, be some disruption, but I believe that consumers will realise that paying an extra £2-3 on CDs and DVDs is a price worth paying if it gives countless small shop owners on our beleaguered high streets the chance to stay alive. Using tax avoidance to keep prices artificially low is simply not sustainable."
 
"I can sympathise with Channel Islands politicians who are concerned that industries will be affected on Guernsey and Jersey, but economies built with foundations on sand are unstable and can never last. For the greater good of many retailers across the UK, this VAT avoidance scheme must be brought to an end for good. Now is the time to do it."

The LVCR loophole has encouraged many large retailers to set up bases on Jersey and Guernsey in order to avoid charging VAT on a range of goods valued at under £18 and sold online.

Unable to move off-shore themselves, or reduce their prices by 20% to compete, countless small high street shops and private online retailers in the UK have been forced to close as a result.

In 2005, the Forum gave evidence about the devastation being wrought on small companies to the All-Party Parliamentary Small Shops Group, which later warned that the UK's small private retailers would disappear completely by 2015 based on the then rate of closures.

On the exploitation of LVCR, the Group's ‘High Street Britain: 2015' report recommended that the Government apply the lowest applicable threshold for goods to be eligible, which is approximately £7 under the relevant EU directive, which would eliminate the vast majority of the trade overnight. It also said that enforcement, by government bodies like Customs and Excise, of VAT should be reviewed to ensure a level playing field.

The following year, the Jersey Licence Policy was introduced, but from the outset the Forum argued these measures were merely a smokescreen. The licensing scheme addressed which companies could exploit LVCR – including restricting non-Channel Islands businesses' activities - but did not limit the volume of VAT-free goods or tackle ‘circular shipping', where goods are sent from the UK to the Channel Islands and then shipped straight back to explicitly avoid VAT.

Further, many of the large companies denied licences simply set up organisations (‘trust companies') that met the licensing conditions or worked with local businesses in order to sidestep the restrictions.

The Guernsey Code of Conduct was not introduced until 2008. It was entirely voluntary and not transparent, ultimately proving equally as ineffective as its predecessor on Jersey.

Former Forum member Richard Allen was forced to close his mainland-based online music retail businesses, Delerium Mail Order, as a direct result of LVCR on goods imported via the Channel Islands.

Mr Allen, along with a group of UK internet and high street retailers, has formed a pressure group called Retailers Against VAT Abuse Schemes (RAVAS).

"In 2005 and 2006, the UK Government was given clear and overwhelming evidence by the Forum of Private Business that LVCR was being used for wholesale VAT avoidance on an industrial scale," he said.

"At that time, I was suffering the surreal injustice of facing my own products circular shipped via Guernsey and mailed back into the UK, undercutting both my mail order and UK customer base. Despite this, and against recommendations from the All-Party Parliamentary Shops Group, officials failed to take the obvious action of lowering the LVCR threshold to 10 euros, which would have stopped the abuse immediately. They cited unsubstantiated ‘VAT collection costs' as the reason for their inaction."

Mr Allen added: "After further pressure, officials in the Treasury opted to allow the Channel Islands to introduce a licence scheme that was subsequently misrepresented as an end to the VAT loophole, both in the UK Budget and by the States of Jersey. In reality, the scheme was nothing more than a control over who could profit from this industry, which continued to expand and destroy UK mainland business for the remainder of the decade."

To stop the abuse of LVCR, the Forum is suggesting that the Government could:

- Challenge schemes and company structures designed to allow circular shipping of goods as abusive tax avoidance arrangements using existing anti-avoidance case law (in particular the Halifax judgement).

- Lower the LVCR threshold.

- Remove mail order goods from the relief on a country-by-country, product-by-product basis (as long as this is not discriminatory and is justified).

- Remove entire products from the relief (apply for ‘a derogation').

For many years the Forum has argued that exploitation of LVCR by large companies is anti-competitive and also amounts to tax abuse because the loophole originated simply to stop perishable goods decaying in Channel Islands' customs warehouses.

Ending the practice is one of the central aims of the not-for-profit organisation's new Get Britain Trading Campaign and is a key proposal in its submission to the 2011 Budget.


Related articles