Do you want to pay more for your DVDs?
Have you ever wondered why internet entertainment giants like Play.com, Amazon (via Indigo Starfish) and HMV have massive offshore distribution centres in the Channel Islands? Of course, you may have had more pressing things on your mind, but if the status quo changes, you may end up shelling out more for your DVDs.
As you may have guessed, tax avoidance is at the heart of this little plan, specifically Low Consignment Value Relief (LCVR) from VAT. LCVR was initially introduced in 1983 to help Channel Island flower growers gain easy access to the UK market, but it is now being exploited/legitimately used* by companies selling everything from DVDs to deodorants.
The idea is simple, for low consignment value orders, under £18, mail order companies based in the Channel Islands can sell items to the UK free of VAT and free from time consuming customs checks on arrival in the UK.
The scheme has been around for many years, but has become more and more noticeable owing to the number of companies trading in the UK who suddenly and coincidentally decided to open massive warehouses in Jersey or Guernsey.
The success of this plan of action means it is quite popular and, due to the favourable tax conditions, companies that have moved to Jersey or Guernsey have typically experienced rapid growth, as demonstrated by the explosion in the size of Play.com, the highly successful transfer of HMV’s online operation from the UK to Guernsey in 2005, and the continued success of TheHutgroup.com who also run sites in Guernsey for Tesco, Asda, Dixons, Argos and others.
But is it fair?
Certainly the big retailers would argue that they are merely taking advantage of the tax laws as drafted, and that a failure to do so could render them uncompetitive. Naturally, ever- savvier consumers searching for the best online deal are appreciative of the cost-savings transferred to them as well.
But what about smaller UK businesses? Can they really compete with the big boys who are legitimately shaving 1/6th off the retail price in non-payable VAT?
And it is the January rise in VAT to 20% making the saving the whopping sixth of the VAT inclusive price that has made this issue a hot topic once again, but Jersey Senator Alan Maclean, Economic Development Minister does not think the industry is not under threat.
He said “Jersey welcomes companies that want to move to the island and employ staff and contribute to the economy, but not people who just want to avoid paying UK tax.” He stated that an agreement had been reached with the UK authorities to stop UK companies coming over to just take advantage of the VAT-free prices, and that 17 (nameless) UK companies were asked to leave Jersey in 2006.
However, given the increasing pressure on the Government to cut spending and raise Revenue, this would be a relatively painless way of collecting loads more lovely VAT.
Conservative backbencher Lord Lucas is now questioning just how much this loophole costs the UK government and how much it costs smaller UK firms, in terms of lost business on price comparison.
Lord Lucas said: "The islands can sell at a price lower than we can buy and that is becoming the case now in areas of cosmetics and of contact lenses and of computer memory of various sorts and in gifts and other areas it seems too.
"I think what started out as a very reasonable concession, whereby we didn't have to employ a lot of customs officers and [the islands] got a benefit for native industries. However, it has become something which is just to painful”.
Whether you are concerned about the pain threshold of a Tory peer or not, if this concession is a casualty of this month’s Budget on the 23rd, it is likely to be consumers who face the injury of paying higher prices for previously VAT free purchases. Arse.
*depending on your perspective