D-Day for Channel Islands VAT loophole: Forum warns of serious consequences for small retailers if tax avoidance scheme remains

The Forum of Private Business is warning of serious consequences for small retailers if the Government’s decision to close the Channel Islands VAT loophole is overturned following a judicial review, which begins tomorrow (Tuesday, 13 March 2012) at 10.30am.

The review has been initiated by the Governments of Jersey and Guernsey, which claim that closing the Low Value Consignment Relief (LVCR) loophole on 1 April 2012 would be discriminatory and illegal. It comes shortly before the Budget and follows a commitment to end the abuse of LVCR from the Chancellor, George Osborne, in last year’s statement.

The Forum and pressure group Retailers Against VAT Abuse Schemes (RAVAS) have long argued that exploitation of LVCR by large companies is both anti-competitive and amounts to tax avoidance. They argue that the change is lawful and necessary to protect small high street shops and internet traders – EU law stipulates that the Government is obliged to act in order to prevent tax abuse and avoidance.

“This tax loophole, accessible only by large companies with the resources to move off-shore precisely with the purpose of avoiding VAT, is both anti-competitive and tax abuse – the Government has done the right thing in finally closing it,” said the Forum’s Senior Policy Adviser Alex Jackman.

“The abuse of Low Value Consignment Relief has been a major factor in the rapid decline in small high street shops, as well as private online retailers. Hopefully the Channel Island’s case will be thrown out of court and we will see a level playing field soon.

“Closing the VAT loophole is essential if we are to create a better tax system that is fair and proportional. Failing to do so would be a significant blow to these aims.”

Representatives of RAVAS are to give evidence at the hearing. Spokesperson Richard Allen said: “The long-term and blatant abuse has destroyed many UK businesses which, other than for the lack of a 20% trading advantage, would have been viable healthy operations giving people jobs and generating tax revenue in the UK.

“While of course we have sympathy for the effect on employment in the Channel Islands that the closure of this industry will have, it is for the people of the Islands to strongly question their elected representatives as to how they could possibly allow an industry that was based on the abuse of tax to become so important to their economy.”

LVCR was created almost 30 years ago as an administrative relief for perishable goods sent by post. However, in the past decade many large companies have moved operations off-shore in order to exploit it, undercutting smaller retailers unable to compete on price.

Best known in relation to CDs and DVDs, a wide range of products purchased and imported from outside the EU for less than £15 qualify as VAT exempt under LVCR. Often, multiple goods orders are broken down to individual packages in order to exploit it. Abuse of the loophole involves a process known as ‘circular shipping’ – exporting goods to the Channel Islands in order to re-import them to UK customers VAT-free.

According to official Treasury estimates the loophole costs £110m a year in lost tax – but many industry insiders believe the real figure is much higher.

The judicial review, which takes place at the High Court of Justice Queen’s Bench Division Administrative Court in the Strand, London, runs until Thursday, 15 March 2012.

Ahead of the Budget, which takes place on 21 March 2012, the Forum is lobbying to make tax simple and proportional as part of its Get Britain Trading campaign.

The not-for-profit employer organisation is calling on all supporters to join the campaign, pass on their success stories and share their growth secrets with other small businesses. For more information visit www.getbritaintrading.co.uk or call the Forum on 01565 626001.