By Claire West

The Forum of Private Business is refuting a claim that closing the controversial Low Value Consignment Relief (LVCR) VAT loophole would hit small firms hardest.

The not-for-profit organisation believes that removing the tax avoidance scheme, which benefits many large companies by allowing them to move off-shore in order to pay no VAT on goods valued at up to £18, is long overdue and could stimulate a resurgence of small high street traders.

The Forum, which in 2005 gave evidence to the All-Party Parliamentary Small Shops Group about the impact of LVCR on small businesses, has for many years campaigned against the tax abuse.

Ending the competitive distortion created by LVCR abuse is one priority of the Forum’s new Get Britain Trading campaign, a central pillar of which calls for a simple and proportionate tax system in addition to measures to boost small firms’ cash flow, create employment and improve skills and provide opportunities for growth.

The campaign underpins the Forum’s 2011 Budget submission, in which the business support organisation is lobbying the Government to close the Channel Islands VAT loophole to prevent further harm to Britain’s high street shops and small, private online retailers.

Following the Forum’s campaigning and recent intervention by the Conservative peer Lord Lucas, the Treasury Minister Lord Sassoon announced that the VAT loophole would be addressed in the upcoming Budget.

However, in an article in the Daily Telegraph, Tesco and Sainsbury’s — retail giants that have set up bases on the Channel Islands in order to benefit from LVCR - defended the loophole because it keeps consumer costs lower.

In addition, the accountancy company Grant Thornton argued that LVCR ‘plays an important role in reducing red tape for small traders’.

It is believed LVCR, which was introduced almost 30 years ago and is a legitimate tax break but prevents a large range of smaller retailers, unable to create distribution centres off-shore, from competing on price, was originally designed as an administrative relief to prevent perishable goods from spoiling in Channel Islands customs warehouses.

However, under an EU directive it must not be used if it leads to tax abuse or distorts competition. The Forum is arguing that it does both, and very clearly damages smaller retailers as opposed to creating benefits for them.

“The very notion that this Channel Islands VAT loophole benefits small businesses is completely wrong,” said the Forum’s Head of Campaigns Jane Bennett. “The story we have been told over the past 30 years is vastly different and is backed by evidence — the abuse of Low Value Consignment Relief has been a major factor in the rapid decline in small high street shops, as well as private online retailers.

“The Government simply must act in the upcoming Budget to close this unfair, anti competitive VAT avoidance loophole. The economic future of our villages, towns and cities is at stake and, given the hundreds of millions in tax revenue lost each year by HMRC, it is mystifying that it has taken until now for something to be done.”

She added: “What makes this even more perplexing is the sheer number of options available to the Government to end the problem, from using existing anti-avoidance precedents in law to lowering the threshold at which the relief can apply and more.

“Closing the VAT loophole is essential if we are to create a better tax system that is fair and proportional. Failing to do so will make it impossible for the few private retailers that are left to continue.

“The argument that getting rid of this tax loophole would be bad for consumers is a grossly misleading one. This is about creating a level playing field which will ultimately benefit consumers by increasing choice and competition.”

To stop the abuse of LVCR, the Forum is suggesting that the Government could:

- Challenge schemes and company structures designed to allow circular shipping of UK/EU goods as abusive tax avoidance arrangements using existing anti-avoidance case law (in particular the Halifax judgement).

- Lower the LVCR threshold.

- Remove mail order goods from the relief on a country-by-country, product-by-product basis (as long as this is not discriminatory and is justified).

- Remove entire products from the relief (apply for ‘a derogation’).