Written by: Dave Waller
With the government reducing the VAT threshold on low-value exports, just how catastrophic could the impact be for legitimate business in the Channel Islands? Dave Waller investigates.
Tax avoidance is a beloved
hobby horse of the UK
press, but coverage tends
to centre on the idea of
high rollers such as Philip
Green sunning themselves on an island while
offshore trusts get busy maximising their
wealth – with the taxpayer supposedly being
the one who suffers. These days, however,
the public coffers are so tight that nothing
can escape the spotlight, which has shifted
momentarily away from Champagne and
super-yachts towards more everyday items,
like Lady Gaga albums and box-sets of Glee.
In this year’s Budget, George Osborne set
his sights on Low Value Consignment Relief
(LVCR), the legal technicality that allows
companies in the Channel Islands to export
items like CDs, DVDs and memory cards to
the UK free of VAT, and which has spawned
a mail-order industry said to be worth around
£750 million a year to the islands. Osborne
vowed to root out those organisations
exploiting LVCR “for a purpose it was not
intended for” – suggesting he’d spotted
another means of sewing holes in the
Treasury pocket and scoring points with
a cash-conscious public.
But it doesn’t end there. Inspired by
gung-ho lobbying from UK retailers (and the
likes of Tory Peer Lord Lucas, who described
the use of LVCR as a destructive “smuggling
exercise”), the European Commission warned
the UK Government in April that if it failed
to curb the ‘exploitation’ it would be in
breach of EU law, which states that under
the principle of fiscal neutrality, no VAT relief
can benefit one state over another.
So LVCR looks like it’s on the way out
– good for the UK Treasury, which stands
both to placate its European peers and
recover £130 million a year in lost VAT.
But if the Channel Islands fail to protect this
important industry it could affect everything
from the islands’ income to their job markets
and postal rates.
Playing the game
LVCR was introduced by the EU in 1983
to solve a problem common to all member
states: how to approach the costly process
of taking VAT from small-value items.
Under LVC R, low-value imports from outside
the EU would be exempt from VAT (the UK
Government set its cap at £18, reduced by
Osborne in his Budget to £15). One of the
first to realise the opportunity was Guernseybased
Derek Coates: in 1996 he launched
Healthspan, offering VAT-free vitamins from
full-page adverts in national newspapers.
With the rise of the internet in the late
1990s, the likes of music and DVD online
retailer Play.com formed to benefit from
LVCR, using the efficient postal system to
flood the UK market with goods at very
appealing prices. The low-cost trend has since
spread to a range of other products, such
as memory cards and printer cartridges.
It’s a very effective retail model, but it
soon turned controversial as UK distribution
companies started operations – with Scottishbased
Indigo Lighthouse setting up a Jersey
‘fulfilment centre’ to ship contact lenses
for Dolland and Aitchison in 1998. Similarly,
Cheshire-based The Hut Group started
warehousing DVDs and CDs in Guernsey for
Tesco, Asda and other large retailers in 2005,
all using circular shipping – where retailers
send their stuff from the UK to the Channel
Islands in bulk, then unpack it for separate
customer orders and ship it back to the
UK free of VAT – essentially giving them
a 20 per cent cost advantage over onshore
rivals. Critics of LVCR argue it’s a green light
for market distortion.
“George Osborne said in the budget
that LVCR is ‘being used for something it’s
not intended for’, which basically means
‘abuse’,” says Richard Allen, a UK retailer
who has waged a one-man crusade against
LVCR, blaming it for the collapse of his online
record business. “The message to trusts and
the lawyers is: ‘This is finished’.”
Indeed, with the EU on the Government’s
back, it seems the recent adjustment to LVCR
is only the beginning. The next step may well
be to reduce its reach only to items under £8,
or to exclude mail-order items entirely. “Now
the EU has threatened the UK with infraction
proceedings if they don’t fix it, LVC R will be
removed in a year,” says Allen.
Allen, who runs the pressure group
Retailers Against VAT Avoidance Schemes,
recently faced off in a Radio 4 debate
on the subject against Phil Balderson,
CEO of Healthspark, a Channel Islands
health company which exports to the UK.
Balderson’s argument is that, used properly,
LVC R is beneficial to both the UK and the
Channel Islands, and its loss would have
“At least 1,000 jobs would be lost
across the islands,” he says. “Plus there are
related jobs in telecoms, financial services
and the internet that may go as a result,
taking it to perhaps 2,000 to 3,000 jobs
lost in total. The cost of data-hosting would
soar if e-commerce players moved away from
the islands, and we wouldn’t enjoy the postal
rates we’ve got now if it wasn’t subsidised
by the fulfilment industry.”
This is serious stuff indeed. Aside from the
direct job losses, the islands’ postal operators have long utilised the profits generated by
LVCR shipments to subsidise their Universal
Service Obligations, which will inevitably
lead to question marks surrounding the
future of their collection/delivery services.
And with the lack of freight heading back
to the UK, operators will have to increase
carriage charges to compensate for loss of
revenue, and this will impact every islander.
On the move
While the Channel Islands tend to receive
the bulk of flak in discussions of LVCR, this
is simply because of their relationship with
the UK and those aforementioned postage
rates, which mean it’s the biggest beneficiary.
But other jurisdictions such as Switzerland
– a major LVCR player – would also stand to
lose out if the EU decided to further clamp
down on this ‘exploitation’. Yet what’s
the alternative? Member governments may
find the cost of low-value VAT outweighing
the savings, and those fulfilment businesses
simply heading to other places with low
corporation tax and low VAT rates, such
as Hong Kong or China.
So is the fate of LVC R already decided?
Balderson doesn’t think so. He believes that
there should be no ground for the EU’s new
position, especially as LVCR is a directive that
the EU itself created. The trick is for the islands
to identify what could be deemed exploitative
and stamp it out.
To its credit, Jersey has done this already.
In 2007, the island ejected the fulfilment
operations of 17 major UK retailers, including
Tesco and Sainsbury’s, having declared that
e-commerce companies would require Jersey
owners, and a physical base there employing
locals. It was a good strong move. The
problem being that Guernsey opted not to
follow its lead.
“Guernsey’s been reprehensible through
all this,” proclaims Balderson. “When Jersey
kicked out UK companies, Guernsey ignored
the opportunity and just let them get on with
it. Osborne talks of the abuse of LVCR, but
it isn’t abuse when it’s indigenous Channel
Islands companies. What is abuse is HMV
and Sainsbury’s moving to Guernsey, or
Tesco moving to Jersey, then to Switzerland
and back to Guernsey. This letter-boxing has
to stop.” He adds: “The biggest loser with
the end of LVC R will be the UK taxpayer. The
solution is for Jersey and Guernsey, perhaps
with Switzerland, to go to the UK and the EU
saying they will boot out letter-boxers and cap
shipment size if they can keep the £18 cut-off.”
The Government is set to review its
position on LVCR in its next Budget, and in
the current climate the Channel Islands can’t
expect an easy ride. Ominously, when asked
by the Jersey Chamber of Commerce about
the role of LVC R, Osborne said: “I don’t think
you should allow an industry just to spring
up on the back of a kink in the tax system.”
And so the islands’ politicians have only one
option: to package their argument and ship
it to the mainland ASAP.
- 1983: The EU introduces LVCR, an
optional system allowing member states
to exempt small items from VAT, potentially
saving them money on tax collection.
The UK sets the maximum threshold at
£18, and extends LVCR to Channel Island
- 1996: Healthspan starts mail order
- 1998: Play.com is founded in Jersey,
and soon becomes the second largest
e-tailer in the UK.
- 2004: HMV online moves offshore
to compete with Play.com. This sparks an
exodus, which soon includes other major
retailers, such as Tesco, Sainsbury’s and Asda.
- 2006: The Jersey Fulfilment Industry
Policy limits activity to legitimate Jersey
operations – those wholly owned by Jersey
nationals. Meanwhile the UK goes to the
European Court of Justice to challenge several
parties, including Halifax, over tax avoidance.
The resultant Halifax Doctrine says tax
avoidance activities aren’t legitimate business,
and therefore don’t qualify for VAT relief.
- 2007: Jersey boots out 17 major UK
retailers. Guernsey doesn’t follow its lead.
- 2010: The UK Treasury tells the Guardian
simply setting up
on the Channel
Islands to take
this relief is not
true. In fact, exports from
the Channel Islands account for a very small
percentage of the CD/DVD market”.
- 2011: Things change under the Tories.
Under pressure to find public money, George
Osborne’s Budget specifically targets the
Channel Islands’ use of LVCR, for the first time
explicitly referencing exploitation.
- 2012: LVCR comes to an end?
No comments have been made on this post.