Channel Islands VAT dodge to end in 2012
Thursday, November 17th, 2011The story below may not seem very important to photographers, but actually, it affects suppliers including 7DayShop, MyMemory, and indeed all the digital and photo processing companies who have used the Channel Islands VAT loopholes.
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The group of retailers campaigning against an industrial-scale offshore VAT avoidance scheme that has destroyed scores of viable, job-creating businesses and cost the UK taxpayer over a billion pounds, is winding down its campaign, having accomplished its mission.
From the 1st of April 2012, Low Value Consignment Relief (LVCR) will no longer be applicable to Channel Island goods entering the UK. LVCR – the exemption from VAT of goods valued below £18 (now £15) originating outside of the EU – had started life in 1983 as an innocuous administrative measure to relieve governments from the expense of collecting incidental amounts of VAT. But from the late 90s it mushroomed into a huge VAT avoidance ruse. Major retailers deliberately circulated UK goods via the Channel Islands – which happen to be outside of the EU for tax purposes – in order to take advantage of the import relief.
The result was a huge competitive distortion, creating a market where the major, even sole, determinant of success became not quality or customer service but ability to route via the Channel Islands and avoid tax.
The exploitation of LVCR also saw the rise of giant online retailers including Play.com and theHut, leading to the demise of UK high street chains like Zavvi and Fopp, but the storm hit the online sector in the UK the hardest.
RAVAS founder Richard Allen explained: “By 2010 there were no online retailers of CDs left on the mainland. Some of the high-street guys could survive because they offered an in-store experience that the offshore websites didn’t, but purely online folk like me who had to pay VAT didn’t have a prayer.”
The impetus for RAVAS began in 2005 when online retailer Mr Allen became concerned at the impact of the abuse of LVCR on his specialist mail order music company, which had been very successful up to that point. By 2006, with the move of HMV’s online operation to Guernsey to compete with Play.com, it became apparent that the level of LVCR use was about to escalate. By 2007 only VAT avoiding businesses could compete in online music retail.
Having been forced, like many other UK music retailers, to close his business and lay off UK staff, Allen began a campaign to end the abuse of LVCR. With help from the Forum of Private Business, including its former Brussels representative Martin Smith, Mr Allen submitted a complaint to the European Commission, focusing on wording in the original LVCR Directive showing that member states had a duty to crack down on avoidance or abuse resulting from LVCR. He was supported by retailers from many different sectors affected by LVCR abuse, including horticulture, cosmetics, computer peripherals, and gifts.
The website www.vatloophole.co.uk became a focus for the group, who eventually managed to make the EU and the new coalition Government realise the true scale of the abuse of LVCR in The Channel Islands. Whilst the Labour administration had completely ignored his campaign, George Osborne responded sympathetically to Mr Allen’s case.
In the UK Budget for 2011 Osborne announced that the government would work with the European Commission to find a way to halt the abuse of LVCR via the Channel Islands. The final instalment of these measures is the complete removal of LVCR from all goods entering the UK from the Channel Islands as of the 1st of April 2012.
Richard Allen said: “When we first initiated the complaint the odds were not exactly stacked in our favour. Many of the people affected had already gone out of business and so we were not a strong voice. We had no money to put into hiring expensive consultants or lawyers, but we argued our case directly with the conviction that we were in the right.
“After four years of communication with the commission, the submission of large amounts of factual data on the ongoing LVCR trade and a meeting with officials, the EU finally ruled that this practice was an abuse of the relief and a barrier to trade. We understand that the Commission has had lengthy discussions with the UK Government to put in place legal measures to prevent the abuse. Whilst it took a long time and huge amount of work the success of RAVAS is living proof not only that the EU complaints system works, but also that anybody can overcome the odds and overturn an injustice if they have a fundamentally sound case and the persistence to argue it thoroughly. ”
Mr Allen and Mr Smith are now encouraging any individuals or businesses affected by faulty policy or anti-competitive behaviour to get in touch and share in the secrets of their success.
Phil McCabe, Senior Policy Adviser at the Forum of Private Business, said: “This VAT loophole has been routinely abused by most of the UK’s large retailers for far too long and the Government’s decision to finally end it is good news for the vast majority of small traders across the UK.
“Allowing these large companies to have a significant price advantage on a range of goods for decades has caused a great deal of damage to high street shops and small online outlets. Many have closed – but others that are left have now been a fighting chance.
“An industry owing its existence to a tax avoidance scheme that is anti-competitive and classed as tax abuse under EU law because it is being exploited for reasons utterly different from its original purpose as an administrative relief, is simply unsustainable. Good riddance to it.
“RAVAS should be applauded for its continued courage, commitment and determination in bringing this damaging trade to an end, particularly by taking the complaint to the EU.”
