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Channel Islanders respond to LVCR abolition

By CMU Editorial | Published on Thursday 10 November 2011

The CEO of a Guernsey-based mail-order company called Healthspan has said that he plans to challenge the UK government’s decision to end so called Low Value Consignment Relief for goods sold from the Channel Islands into the UK.

As previously reported, for years LVCR has meant that mail-order operations based in the Channel Islands have been able to sell low value goods (originally under £18, now£15), including CDs and DVDs, to customers in the UK without charging VAT. This gives Channel Islands-based operations a 20% advantage over firms based on the UK mainland, and as mail-order boomed when the internet went mainstream ten years ago numerous companies set up business in the English Channel to capitalise of the loophole.

Those who have campaigned to have the loophole closed argue that the rapid growth in VAT-free retailers selling into the UK over the last decade made it hard for traditional high street retailers here to compete, and also meant that independent record sellers, who couldn’t afford an offshore base, were unable to capitalise on the boom in the mail-order strand of their business, which could have compensated for the decline in high street CD sales.

After years of both the British and Channel Island governments paying only lip service to concerns about the growth in VAT-free online retail – growth that arguably breached EU tax rules that forbid the use of tax relief programmes to seriously distort a market place – the Coalition government started to act last year and announced earlier this week that they would phase our LVCR relief for the Channel Islands next April.

Although, as more and more companies exploited the loophole, the eventual demise of LVCR was inevitable, many mail-order firms based on the Channel Islands have criticised the UK government’s decision this week. Most hone in on the fact that LVCR will only be axed on imports from the Channel Islands, but not other countries outside the EU, meaning companies currently using the tax dodge from Jersey or Guernsey could just move their operations to, say, Switzerland or Hong Kong, and carry on benefiting from the VAT relief. That, some argue, is discrimination against the Channel Islands.

The UK government says its axing of LVCR only applies to Channel Island imports because that’s where use of the tax relief system is excessive. It’s a legitimate point. The reason LVCR exists is because the quantity of low value goods imported into the UK used to be minimal, so that the amount of sales tax generated by low value goods was nominal, and therefore not worth collecting once admin costs were taken into account.

But by definition, if a large number of businesses then capitalise on the loophole, then the number of goods ceases to be minimal, therefore the total sales tax that could be collected ceases to be nominal, so therefore the logic for the relief in the first place no longer stands. Added to the obligation under EU law that tax relief systems shouldn’t skew the market – and there needs to be mass use of the relief system for that to happen – there is a logic to government only targeting those places where LVCR is used to excess.

Though, of course, this means the government will be obliged to act if and when exploitation of LVCR in other countries becomes excessive, and the campaigning group which has led on this – RAVAS – has pledged to continue campaigning to ensure this happens.

Either way, Healthspan boss Derek Coates told the BBC that he had been advised by lawyers and accountants that there was a case for fighting the government “on the basis of discrimination against the Channel Islands”. While admitting the end of LVCR wasn’t a complete surprise, he continued: “What is surprising and disturbing for all the Channel Islands is the way the UK have treated our islands with such disdain. They have taken no steps to stop LVCR imports from any other country outside the EU including Switzerland, Cyprus, Hong Kong, the USA or China”. He concluded: “We are in the process of launching a legal challenge, perhaps in the form of a judicial review”.

While it’s expected many of the Channel Islands-based mail-order operations may now relocate, either back to the UK or to another country where LVCR is still available – likely leading to up to 1000 job losses – Coates added that he planned to stay put, saying: “Healthspan is a Guernsey-based business that I started here in the island because I am a Guernseyman”.

Elsewhere the Guernsey Bulk Mailers Association was blaming the island’s own government for the end of LVCR, arguing that if it hadn’t let the big CD sellers set up shop on the island, then use of the tax relief would not have become so big or high profile back in the UK, and the campaign to abolish it may have never got off the ground. Though according to the BBC, the island’s Commerce & Employment Department argued back that had it not let the big British mail-order firms in, they would have joined the lobbying efforts to have LVCR phased out and the tax relief would have ended much sooner.

Don’t forget, you can read the CMU interview with Richard Allen, a key campaigner against LVCR, exploring the history of the tax relief system and the campaign against it here.