By Claire West

Retailers Against VAT Avoidance Schemes (RAVAS) today added their voice to the Forum for Private Business in calling upon the government to follow up fine words with concrete and meaningful action to stop a massive tax avoidance scheme that is costing the Treasury a nine-figure annual sum and wreaking havoc on UK retailers.

Low Value Consignment Relief (LVCR) is created by a little-known European Directive from 1983, and exempts goods from outside the EU below a certain threshold value (currently £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 have been using it to send products to the Channel Islands — outside the EU for VAT purposes — and back to the UK in order to avoid VAT. 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 dropping like flies.

Richard Allen, founder of RAVAS and former Manager of Delerium Mail Order, which closed down in 2007 as a result of being undercut by VAT-free competition, says: “this is anything but a high-street versus Internet issue. It is an onshore versus offshore issue. My business was purely online and saw nothing but growth until HMV opened a distribution centre in Guernsey to compete with Jersey based in late 2005. I shut down in 2007.”

At a debate in the House of Lords on Wednesday Lord Sassoon, Commercial Secretary to the Treasury, said that the government would be ready to announce in the Budget some steps to counter the exploitation of LVCR via the Channel Islands. Although LVCR is enshrined in EU law, it is clear, and HMRC now accepts, that it was not intended for the purpose for which it is now being used, and a range of options is open to the government to counter what is happening.

Mr. Allen, though, said that UK businesses should reserve judgment until the government reveals its exact measures in the Budget. “We need to see what they are actually going to do about it. The previous government convinced the Channel Islands to start a licensing scheme to try to limit the trade but all that did was concentrate it in the hands of those who were able to get licenses. Almost all CDs bought online in the UK still come from Channel Islands distribution centres,” he pointed out.

Mr. Allen cautioned the Treasury against falling for any slick lobbying against the closing down of the circular trade. “VAT avoidance apologists try to pin the demise of independent music stores on supermarkets or downloads, but supermarkets entered the market 15 years ago and haven’t changed their position since this has been going on; downloads may be huge in the singles market but are still pretty marginal in the albums market, where most of the independent stores operate.

"They also claim that the administrative cost of collecting the VAT would outweigh the revenue. But look at books. Books are VAT-free in the UK and so there is no advantage to sending them offshore: no UK retailer sells books to the UK from the Channel Islands. This shows that if there is no VAT advantage, the entire trade occurs within the UK. This would happen with CDs. There would hence be no extra administrative cost on Customs officials.”

Mr. Allen noted the reach of these false arguments: “the problem we have had is that HMRC has been believing these false stories because it has been getting its advice from consultants who specialise in offshore tax arrangements, and hence have a vested interest in seeing the trade continue. Not once did it seek input from anybody representing independent music retailers. Only recently have I been able to meet with HMRC officials and give them the real story.”

Commenting on the government’s apparent about-turn, Mr. Allen noted the recent increase in VAT. “We are now getting desperate calls from people in the computer memory cards industry, ink cartridge industry, in fact anything that can easily be shipped to the Channel Islands and back. The increase in VAT to 20% has increased the price differential between loyal taxpayers and tax avoiders.

"The computer memory cards industry is said to be seven times the size of the music industry, so the VAT loss is clearly greater than estimates - now put somewhere between £130m and £160m a year. The rapid and blatant spread of this VAT avoidance to other mail order sectors and its further negative impact on the UK retail sector is clearly forcing the Treasury into a change of thinking.”

Despite the complex legalities and history, Mr. Allen believes the issue is actually very simple. “We are supposed to have a competitive free market economy. It can’t be competitive if the government gives one set of retailers a price advantage. That is bound to distort the market. In fact my 11-year-old daughter can see why a 20% price disadvantage is terminal for UK businesses. No amount of attempted explanation will justify it. It’s just plain wrong.”