By Max Clarke

The Forum of Private Business is urging the Government to close the Channel Islands VAT loophole once and for all in next week’s Budget - not repeat mistakes made in 2005 and 2008 when a much-lauded licensing scheme and ‘code of conduct’ failed to solve the problem.

In 2005, a Jersey licensing scheme was launched and subsequently heralded as ending the abuse of Low Value Consignment Relief (LVCR), which the Government says costs the Treasury at least £130 million per year in lost tax revenue. In 2008, a Guernsey Code of Conduct was established.

In reality, neither scheme has prevented the large-scale VAT avoidance by large companies, at the expense of their smaller competitors. Both failed to limit the volume of goods being sold VAT-free into the UK.

In order to begin to reverse the devastation that has been caused to the UK’s high streets as a result of large retailers exploiting the VAT loophole, the Forum has written to the Chancellor, George Osborne, urging him to plough some of the additional tax revenue that would be earned by closing the loophole into Community Investment Tax Relief (CITR), which encourages private investment into Community Development Finance Institutions (CDFIs).

Since 2003, CITR has helped raise almost £70 million in affordable credit for businesses and social enterprises. The scheme’s state aid exemption ends in 2012, meaning that, unless it is renewed, under EU laws limiting public financial support for the private sector, the tax relief available will be severely curtailed.

Phil Orford, the Forum’s Chief Executive, said: “There have been indications that the 2011 Budget will finally tackle the widespread VAT avoidance carried out by large, Channel Islands-based retailers, which devastates high street shops and smaller online retailers, but any measures must genuinely end this anti-competitive tax abuse and not just create a smokescreen of the kind we saw with the Jersey license policy of 2005, and later Guernsey’s non-binding code of conduct.

“What better way to begin reversing the damage caused to our high streets by this long-standing practice than to use the additional tax revenue to support Community Investment Tax Relief, and encourage investment in businesses and social enterprises in these same communities?”