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VAT loophole issue goes to European tax investigators
By CMU Editorial | Published on Wednesday 4 February 2009
Following yesterday’s report on the upcoming copyright extension debate in the European Parliament, time now for another long running CMU story that has taken on a European dimension.
The European Commission is investigating the much reported tax loophole that lets mail order operations sell low-priced goods, and especially CDs and DVDs, to British customers without having to pay the VAT that their competitors based in the UK (high street or mail order) have to charge.
As much, much previously reported, there’s a weird rule that means that goods imported into the European Union under a certain price – £18 in the case of the UK – are exempt from VAT.
The rule, which comes from an EU directive, pre-dates the internet so only used to affect a minority of imports, normally by individuals. But since the growth of online shopping the loophole has become big business because it means mail-order operations can set themselves up in places like the Channel Islands – outside the EU but close enough to the UK mainland to make mail-order viable – and then undercut their competitors by £1.50 for every £10 CD (or undercut by a pound and pocket the 50p).
The loophole has been especially used in the music and movies space where most CDs and DVDs fall under the £18 price mark. Play.com, HMV, Amazon, Tesco and Asda all utilise mail-order facilities on the Channel Islands so they can sell CDs via their online mail order websites without paying VAT (CDs that they normally ship in from the UK, and then mail out back to the British mainland).
That practice has been much criticised by independent retailers based in mainland Britain who argue it gives their bigger rivals an unfair advantage, because they can’t compete, in their stores or via online mail-order services, because their prices will always be 15% (or 17.5% until recently) more expensive. The practice also means, of course, that the UK misses out on millions in tax revenue (some estimate up to £80 million each year).
As previously reported, both the UK and Jersey governments have in the past said they would look into closing the loophole. The latter did make some moves to stop the expansion of it by limiting the number of new mail-order businesses that can set up there, and by asking some existing UK firms who had mail-order offshoots on the island to leave. Though that mainly just meant that those Channel-Island-based ‘b2b companies’ who operate mail-order services on behalf of other retailers could win more business.
With the recession kicking in and everyone looking for cost cuts other non-music businesses are also starting to use loophole more proactively. Health food retailer Holland & Barrett recently complained to European officials because some of its competitors are using the tax dodge to offer cheaper herbal remedies and food supplements. They have gone the Brussels route with their complaint because they say the UK government has failed to appreciate or tackle the loophole problem.
According to The Guardian, the UK government have told Brussels officials that the loophole issue has been exaggerated by those retailers who oppose it, and that the aforementioned action taken by the Jersey government has reduced its impact.
But the paper says: “[We have] found some of the biggest names in retailing, including some that had previously retreated from Jersey, are legitimately using agent companies with operations on the island to gain the benefits of the tax relief. Tesco, Asda and Amazon each use agent companies with operations in the Channel Islands able to transact with customers in a way that qualifies for the relief”.
The EU’s Taxation Directorate is now investigating complaints by UK retailers regarding the loophole and its continued use. A spokeswoman for the Directorate, Maria Assimakopoulou, told reporters last week that its finding would be released in due course, though it is too early to comment on the investigation as yet.
Richard Allen, who, among other music ventures, runs an independent UK-based music mail-order website and who therefore has witnessed the impact of the VAT-dodging cost-cutting major players on smaller e-tailers first hand, has been lobbying against the loophole for years, and told CMU this week: “Despite being given detailed written evidence and warnings in 2006, by myself and a group of retailers and distributors, that if action wasn’t taken to stop the obvious abuse of this relief the market would become so distorted that many smaller UK retailers would go out of business within the next year or two the government has done absolutely nothing effective to halt the flow of goods out of the Channel Island”.
“They essentially passed the buck regarding this problem to the Channel Islands, even though they don’t have any power whatsoever to control this tax relief, being outside the EU. Given the UK government’s response, we’ve had no option but to take this to the EU Tax Directorate, and we are confident they will reach the same conclusion we did that this is an abuse of the relief, and will force the UK government to finally take action”.
He added: “I think it’s absolutely outrageous that no trade body in the music industry has taken a stance against this, leaving it to independent players like myself to fight the tax relief abuse, especially given the impact the tax dodge is obviously having on our traditional independent music retail sector”.
