The government has said it will be keep under "close review" those companies who use a VAT loophole in the Channel Islands to cut the costs of CDs and DVDs. That announcement follows a formal complaint from the Forum for Private Business who said the loophole gave companies like HMV, Boots, Woolworths and Tesco an unfair advantage over independent music retailers - an advantage that was costing the tax payer tens of millions of pounds.
As previously reported, the loophole in question is the fact that imports into the UK from outside the EU are not subject to VAT when items cost less than £18 each. Because that covers most music releases, a number of firms are now running their music purchasing through Guernsey - the Channel Islands being geographically convenient, but not part of the EU.
The Guernsey government themselves have recognised the growth in the number of companies cashing in on the loophole and they recently announced they would become much stricter in the distribution of licences that allow such firms to trade there. However, those who already possess such a licence are still at liberty to use the VAT-avoiding system, hence the complaint by the FPB.
With that in mind, the Forum's boss, Nick Goulding, recently confirmed that he had 'reported' HMV and the Guernsey government to the Treasury, HM Revenue and Customs and the National Audit Office, adding: "This whole deeply cynical exploitation of the Channel Islands tax status is utterly unacceptable and wrong".
Following the FPB's formal complaint, a spokesman for the Treasury confirmed that the government was keeping the issue 'under close review', though he added that what HMV et al were doing was not illegal. The spokesman said: "We are aware that a number of businesses are restructuring in order use this relief to sell goods to customers in the UK, free of VAT. Whilst this practice is legal, the government continues to keep this issue under close review."
Responding to the FPB's complaint, a spokesman for HMV told reporters: "Contrary to what the FPB has been asserting, we are not suddenly operating in Guernsey to take advantage of the tax reliefs. The move has been planned for a long time now and there are a number of other reasons besides tax relief behind the decision." So, that's alright then.