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UK.gov moves to close VAT loophole on etailers

Big boys will no longer be able to slip through

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The UK government is planning to close the loophole in tax law that was allowing online retailers to funnel goods through the Channel Islands and thereby evade import VAT.

The Exchequer Secretary to the Treasury David Gauke told the Commons yesterday that there would be further reforms to the relief from import VAT known as Low Value Consignment Relief (LVCR) so that small and medium businesses could have a level playing field. Oh, and so HMRC could net an extra £100m a year, so not entirely for the little guys.

Originally, the relief was intended to protect stuff that didn't cost that much from VAT, because collecting the tax would cost more than it was worth and to stop perishable goods shipments getting held up by customs.

That was when it was mostly applied to safeguard Guernsey's flower producers, but when online shopping came along, the relief meant that big etailers like Amazon could undercut small, local businesses on price.

All Amazon and Play.com and others had to do was build some warehouses in the Channel Islands and they were able to squeeze past VAT on the LVCR.

Back in March, the Chancellor of the Exchequer George Osbourne said the government was "going to tackle the exploitation of LVCR that has left our high street music stores fighting a losing battle with warehouses in the Channel Islands".

He then proceeded to reduce the value of goods that counted under the relief from £18 to £15, which given the price of CDs these days wasn't really doing all that much.

Yesterday, Gauke said that was just the first step in reforming LVCR.

"I can announce today that, as from 1 April 2012, LVCR will no longer apply to goods supplied commercially, as part of a distance selling transaction, from the Channel Islands. Legislation to enact this change will be published in draft on 6 December for inclusion in Finance Bill 2012," he said.

"This will mean that supplies from business in the Channel Islands bear the same VAT liability as supplies from VAT-registered businesses in the UK."

The Forum for Private Business (FPB), which has been campaigning for an end to LVCR, welcomed the move.

"It's good to see the government has listened to the concerns of small retailers and acted decisively to stop this unfair, unjust practice. Of course, it will mean a few more pounds heading to Treasury coffers on every purchase, but I'm sure there will be a lot of happy record shop owners today," Jane Bennett, head of campaigns at the FPB, said in a statement.

"Virtually all the main players in the online industry mail CDs and other similar items like Blu-ray discs from the Channel Islands to customers. This totally unfair loophole has allowed them to totally dominate the market and put thousands of small, independent traders out of business."

The Channel Islands had been singled out because most of the international parcel post from outside the EU was coming from there and a lot of it seemed to be linked to exploiting the relief, Gauke said.

It was also going to be easier for HMRC to collect the tax on the islands as companies based there can join the 'Import VAT Accounting Scheme', which allows for automatic collection of VAT at source.

"The ease of access of companies based in the Channel Islands to the UK consumer market is therefore very similar to that of domestic UK-based companies, in contrast to their non-EU counterparts," he added. ®

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