By Claire West

The group of retailers campaigning against an industrial-scale offshore VAT avoidance scheme that has destroyed or damaged their businesses and cost the taxpayer hundreds of millions of pounds, has called on the UK government to take genuine action rather than tokenistic half-measures to clamp down on the scheme.

The group is concerned in particular that the government not be fooled into letting companies continue the scheme simply because they have set up sophisticated company arrangements to make themselves look like genuine Channel Islands companies.

Retailers Against VAT Avoidance Schemes (RAVAS) is a UK pressure group of independent retailers fighting the practice of large retailers avoiding VAT by routing their products through the Channel Islands. The large retailers are able to do this because of Low Value Consignment Relief (LVCR), a relief created by Directive 1983/181/EEC that exempts from VAT any exports below a certain threshold value, which the UK government has set at £18, but which could be as low as £10. The original purpose of LVCR was to expedite the processing though Customs of perishable goods and to save the administrative costs of collecting small amounts of VAT.

The Channel Islands are outside the EU. Hence since the turn of the century and the advent of Internet retail, large retailers of especially CDs and DVDs, but now increasingly other products such as memory cards and ink cartridges, car parts and gifts have been routing goods through the Channel Islands. In 2005 HMV, one of the major players in the UK music industry opened a distribution centre on Guernsey, part of a stampede of major retailers to offshore facilities in an attempt to compete with the biggest offshore retailer www.Play.com.

As a result, onshore UK retailers, unable to compete with offshore VAT-avoiding competitors, have been going out of business at an unprecedented rate. Both high-street chains - such as Zavvi and Fopp – and pure-online retailers such as Delerium Mail Order, based onshore in the UK, have disappeared, proving that the determinant of success is not whether a retailer is on the high street or online, but whether they sell from onshore or offshore facilities.

Although LVCR is created by EU law, the EU Directive creating it also stipulates that it must not be allowed if it distorts competition or creates any evasion, avoidance, or abuse. The Principle VAT Directive – 2006/112/EEC, previously 1977/388/EEC - also stipulates that “similar goods bear the same tax burden,” a condition clearly violated if goods routed through the Channel Islands are VAT-free while competing and equivalent products that stay onshore are taxed. Her Majesty’s Revenue & Customs has recently admitted to RAVAS that LVCR is being used for a purpose totally contrary to its intentions. Up until now, the UK government, for reasons best known to itself, has refused to do anything about this avoidance that is costing it over £100m a year and destroying several of its viable businesses in its most important cultural export industry. However, Treasury minister Lord Sassoon recently announced in the House of Lords that the government would announce in the Budget on 23rd March what action it intends to take.

In its Budget submission, RAVAS has called on the government to make this action meaningful. “We have seen before,” said RAVAS spokesman Richard Allen, “what happens when the authorities act simply in order to be seen to be doing something. In 2007 the Jersey government, at the request of HMRC, introduced a license scheme, supposedly in order to restrict the trade. But it had no effect on the volume of goods being sold and all it did was concentrate the trade in the hands of those who could get licenses. Now, 96% of CDs bought online in the UK come from the Channel Islands. The license scheme did nothing.”

RAVAS is now particularly concerned that the UK government could get hoodwinked into allowing some companies to continue the avoidance because they manage to call themselves “genuine Channel Islands companies,” and claim not to be using the islands purely to avoid VAT.

Allen believes that the UK and Channel Islands governments should look more deeply into these “genuine Channel Islands companies.” “Offshore consultants advertise their services openly. They can set you up with a Jersey company that has nominee local directors. People close to this whole scam have told us how these nominee directors get told to say they are attending board meetings when they are actually playing golf. The whole management is in the UK and the only reason this “genuine Jersey company” is set up in the first place is to avoid VAT.”

“Why would anybody selling predominantly to the UK continue to be based in the Channel Islands? Play.com, for example, started in the Channel Islands but when it comes to non-LVCR eligible goods, they have a huge office in Cambridge and other depots on the UK mainland. HMRC need to question if the remaining Channel Islands operations are there for genuine commercial reasons and not to avoid VAT”

For this reason RAVAS has issued the following demand of any action announced by the government against the exploitation of LVCR via the Channel Islands:

RAVAS will not be satisfied until HM Treasury takes definitive action and introduces a measure to prevent LVCR being used by any company, in any way, to gain a distortive price advantage over VAT-paying competitors in the UK. The application of LVCR must not be contrary to the intentions of Directives 2006/112/EEC and 1983/181/EEC: namely that equivalent goods must bear the same tax burden, that relief can be granted only on the condition that it is not liable to affect the conditions of competition on the home market, and that any evasion, avoidance, or abuse must be prevented.

If a company’s sole reason for maintaining facilities on the Channel Islands is to avoid VAT – such as if the overwhelming majority of its sales are in the UK but it remains a Channel Islands company for no apparent commercial reason - this should be considered avoidance.

The test for whether sufficient action has been taken is as follows: is it possible for businesses that do not have offshore facilities to compete, on an equal basis regarding the VAT that they must charge, with those that do?