Value-Added-Tax-free imports from the Channel Islands
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Value-Added-Tax-free imports from the Channel Islands are exports of goods from the Channel Islands on which value added tax (VAT) is not levied due to the operation of an EU tax relief called Low Value Consignment Relief (LVCR). In recent years, retailers, politicians and academics in the United Kingdom have expressed concern at the potentially unfair and damaging economic advantgage this affords to retailers based in the Channel Islands who are able to offer the same products as UK retailers but at significantly lower prices. Unsurprisingly VAT free mail order goods have become very popular with UK consumers and demand for VAT free mail order on the UK mainland has resulted in the rapid growth of internet mail order retailers such as www.play.com and www.hmv.com
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[edit] Background
The Channel Islands consist of the two Crown dependencies of Guernsey and Jersey, which are self-governing, but historically linked to the Crown. As such they are not part of the European Union and do not charge VAT on purchases (although a 3% goods and services tax was introduced in Jersey on May 6th 2008).
When goods are imported into the United Kingdom from a non-EU territory, an excise duty is charged at the same rate as VAT (currently 15% for most goods). Value Added Tax is an EU tax adopted by the members states of the European Union. However as a result of the action of an EU regulation designed to enable a reduction in the cost of tax collection on small consignments, an exception is made on shipments of a low value. This is an administrative relief known as Low Value Consignment Relief or LVCR and it is goverened by an EU directive [1]. It can be set between €10 and €22 by individual member states of the EU. The UK set the limit at its maximum level, which equated to £18 at the exchange rate agreed upon by the EU.
Items such as DVDs and CDs - and more recently health foods, printer cartridges, computer spares and peripherals, camera spares and other low value high volume goods - commonly cost less than this £18 threshold, and therefore if imported into the UK from one of the Channel Islands, are exempt from VAT under the LVCR regulations as currently applied by the UK Government. As it has become easier to sell by mail order with the growth of the Internet, the practice of selling CDs and DVDs through the Channel Islands and taking advantage of the relief has become more common. HMV cited in their 2006 Year End report that relocating to Guernsey was to take advantage of VAT free mail order as key method of improving competitiveness [2]
Often the reduced tax liability gained from offshore mail order outweighs the increased postage costs, meaning that the Jersey-based retailer can undercut competing retailers based in the UK [3]. Because of the regular cross-Channel ferry links it is easy to export UK goods to the Islands and in recent years the Jersey Post Office, through its sister company Jersey Post Logistics, has set itself up as an Internet fulfillment operation taking full advantage of the LVCR service so that goods can be sent from the UK to Jersey and back again by mail within 48 hours [4]
A similar situation does not exist between the Isle of Man, another Crown dependency, and the UK. The Isle of Man is in customs union with the UK, and VAT is levied within the Island.
[edit] Controversy and legal arguments
The Channel Islands have no say over the operation of Low Value Consignment Relief as they are not members of the EU and the relief is granted to the importer of the goods and not the exporter. However the Channel Islands whilst having no direct influence on the tax policies of the UK government do regularly discuss taxation issues with the UK Treasury and HM Revenue and Customs [5]. Like all EU tax regimes LVCR is ultimately policed by the EU.
The bulk of mail order goods sold through the Channel Islands are UK products exported to the Islands and then mailed back into the UK VAT free. In the case of DVDs this is shown to be true by virtue of the fact that films must be certified by the British Board of Film Classification in order to be legally sold in the UK. Only UK certified DVDs are therefore available from The Channel Islands indicating the circular route of distribution. Similarly CDs are often licenced to specific territories and record companies strongly defend their regional licencing arrangements as has been shown by the BPI action against www.play.com when they tried to bring in major label VAT free CDs from outside the EU/UK [6].
Certain UK companies, tax academics, politicians and journalists have described the UK Governments policing of LVCR as inadequate allowing LVCR to be used as a tax loophole and have described the scale of LVCR use from The Channel Islands as an abuse of the EU regulations. Many UK retailers claim that they are losing turnover on low value items by losing customers to companies selling direct from the Channel Islands at lower VAT free prices with which they are unable to compete. Channel Island based companies claim their use of the relief is legitimate as it has not been challenged by HM Revenue and Customs who appear to allow the trade to continue and expand.
Some legal commentators have pointed out that this practice runs contra to the intent of the EU legislation covering Low Value Consignment Relief [7]. In January 2007 a group of UK retailers threatened to take the UK Treasury to judicial review if it failed to implement EU regulations surrounding Low Value Consignment Relief to their satisfaction. The retailers pointed out that the EU directive disallowed relief on any imported goods that created a distortion in competition in the home markets or created a vehicle for tax avoidance, tax evasion or abuse. The directives specifically mention mail order goods as a possible source of abuse and give member states the power to disallow relief on mail order goods entirely. The retailers involved in the judicial review were unable to fund this action as some of them (specifically the high street music and DVD chain Fopp) went out of business. The legal argument is yet to be resolved and the UK Treasury have yet to clearly announce their position, so the threat of Judicial Review remains. In addition, The EU Directorate Of Taxation which oversees the operation of EU tax directives has yet to make a clear judgement on the UK Government's application of LVCR.
[edit] Government reaction
The Government of the United Kingdom mentioned the issue in the 2006 Budget wherein they stated "In 1984, a VAT-free threshold on imports of small commercial consignments from outside the EU was introduced at a level of £18, as an administrative relief. The Government is aware that this provision is currently being exploited....If the relief continues to be exploited by businesses using offshore locations, the Government will consider changes to prevent this type of behaviour" - UK Budget 2006 5.107 [8]. The 2006 budget also stated that £85 million per year was currently being lost in unpaid VAT as a result of this trade. This amount is expected to rise to £200m soon.[9] Since 2006 the UK Government has taken no direct action leaving the Channel Islands to regulate the trade internally. The UK Government has stated that any action to stop the LVCR trade would damage the UK post office [10] an argument that those opposed to the LVCR trade have argued is legally and materially irrelevant as they say that the mail order trade would continue on the UK mainland if it was stopped offshore.
The States of Jersey in March 2006 announced a new policy intended to govern the fulfillment industry in the Island and stated that companies who export to the UK by mail order must first obtain a licence [11]. They argued that this was to ensure that the Island was not taken advantage of and that tangible economic benefits would remain in the Island. Critics point out that despite limiting the number of retailers operating the policy does not limit the volume of goods sold over the internet VAT free and it also stops new companies entering the VAT free market. In 2007 owing to the bad press generated by the expansion of the fulfillment industry in the Channel Islands, the government of Jersey announced that it had asked certain UK retailers to cease their operations there. Under the March 2006 policy a legitimate Jersey operation was one wholly owned by Jersey nationals. One of the companies asked to leave was Tesco and despite keeping their offices in Jersey they moved their fulfillment operations to Switzerland. This has provoked some Jersey Government ministers to point out that the new policy did not actually stop the trade or help the Island's economy. More recently Tesco were operating in Guernsey using the services of TheHut.com and similarly UK retailer 101cd.com became a legitimate Jersey retailer in 2006 by transferring the majority of its ownership to Jersey nationals.
Guernsey has no official controls over companies taking advantage of LVCR as demonstrated by the highly successful transfer of HMVs online operation from the UK to Guernsey in 2005, a growth that continues without any obvious limitations.
Despite various changes in local legislation and company ownership the bulk of customers for CDs and DVDs remain in the UK and the VAT avoidance mail order industry continues to flourish and expand in the Channel Islands.
[edit] Retailers operating from the Channel Islands
The following is an incomplete list of retailers that sell to the UK from the Channel Islands to profit from the tax regime.
[edit] Jersey
- Play.com – Play.com is a Jersey company which also operates offices in Cambridge in the UK.
- Sendit.com – Orders under £18 are fulfilled by a sister company Sendit (Jersey) Limited
- BlahDVD.com – Operates entirely from its headquarters in Jersey, and has been trading since April 2003.
- 101cd - Originally based on the UK mainland this retailer was bought out by BlahDVD.com
- www.digidave.co.uk claims to be a wholly owned Jersey company selling computer related products
- feelunique.com - Jersey based on-line retailers of assorted beauty products
- memorybits.com - jersey online retailers for parts for phones,cameras ect
- moonpig.com - jersey online retailers for greetings cards.
[edit] Guernsey
- aceparts – aceparts.com customers can buy HID lighting, Wiper blades and other car accessories vat free from Guernsey
- Amazon UK – visitors to amazon.co.uk will be given the option to buy from the sister site Indigo Starfish in Guernsey
- Filmnight.com
- TheHut.com A highly successful offshore fulfillment/mail order operator
- HMV.co.uk
- HealthSpan.co.uk
- Tesco – visitors to Tesco.com will be given the option to buy from the sister site operated by TheHut.com
- Asda – Customers can buy VAT free goods on a site using the services of the TheHut.com
- WH Smith – Customers can buy VAT free goods on a site using the services of the HTheHut.com
- Argos – Customers can buy VAT free goods on a site using the services of the TheHut.com
- Dixons – Customers can buy VAT free goods on a site using the services of the TheHut.com
- Zavvi – Customers can buy VAT free goods on a site once owned by a high street music retail chain and now operated by TheHut.com
- Woolworths – visitors to woolworths.com will be given the option to buy VAT free goods from a site operated by TheHut.com and owned by The Barclay Brothers
[edit] References
- "Are import duties and import VAT always payable?". Notice 143: A Guide for international postal users. Her Majesty's Revenue and Customs. August 2005. http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?id=HMCE_CL_000014&propertyType=document#P58_4584. Retrieved on 2005-12-29.
- ^ "Call to end CD sales loophole". BBC News. 2005-06-14. http://news.bbc.co.uk/1/hi/business/4076524.stm.
- ^ "New moves to close VAT loophole". BBC News. 2005-07-22. http://news.bbc.co.uk/1/hi/world/europe/jersey/4707463.stm.
