By Max Clarke

In a letter to the European Commission The Federation of Small Businesses has called upon EU officials to ensure that the UK Government brings to an end the abuse of Low Value Consignment Relief (LVCR). They join the Forum of Small Business (FSB), who has been campaigning on the issue since 2005. LVCR stems from a little-known European Directive from 1983 and exempts goods from outside the EU, below a certain threshold value of £18, from VAT.

It was originally introduced to imports from The Channel Islands to reduce the time spent in Customs for perishable horticultural goods. However, for more than six years now, large UK retailers and indigenous Channel Island companies have been importing UK and EU products to the Channel Islands — outside the EU for VAT purposes — in order to retail them by mail order back to the UK free of VAT.

Recently a senior HMRC official stated that “the relief and the special VAT position of the Channel Islands were never intended to be exploited in this way to supply goods VAT free to UK consumers” giving credence to the many complaints that The UK Government has had from UK business since the late 1990s that this practice is causing a major market distortion. Onshore retailers - initially of CDs and DVDs but more recently of various products from memory cards through to ink cartridges and gifts - who still have to charge VAT, have been suffering and going out of business, with entertainment retail being the most severely hit so far.

Now members of the Federation of Small Businesses who retail on the internet have been affected and in a strongly worded letter to the European Commission on behalf of its 200,000 members Mike Cherry, the FSB’s National Policy Chairman, highlights the abuse of LVCR in relation to its membership. In it he quotes a recent Eurostat report that reveals that 66% of individuals in the UK bought goods online in 2009. Mr Cherry describes the UK’s failure to protect VAT on internet retail as having “grave consequences for fair competition on the internet within the EU market” and goes on to point out that VAT is the “one tax that that has a direct effect on all small businesses and that the UK Authorities have failed in their duty to protect UK small business from the abuse of VAT through their lax application of LVCR and acceptance of circular shipping which has resulted in onshore firms being unable to compete with large retailers, who have been able to set up operations in the Channel Islands and avoid VAT on goods intended for consumption within the EU/UK” He concludes that “The distortion of competition caused by the UK Authorities’ inaction has created a severe imbalance forcing those who have to pay VAT out of business as they are unable to compete with those companies able to avoid VAT offshore” and he then calls on the commission to take firm action to ensure that the UK “ceases immediately from allowing such a flagrant tax avoidance scheme to continue”

Richard Allen, Spokesperson for RAVAS (Retailers Against VAT Avoidance Schemes), welcomed the FSB’s stance stating that “The FSB’s comment on this issue recognizes that the primary determinant of whether a business in one of the affected trades succeeds is now not the quality of its product, nor its status as a small or large, high-street or online business, but whether it can avoid charging VAT. An initially harmless European Tax relief is being exploited for a purpose totally contrary to its intentions. We hope that the UK Government uses the budget to end this dishonest avoidance scheme once and for all.”