The Guardian published a long article on the VAT abuse that Jersey and Guernsey continue to facilitate VAT abuse in the UK yesterday. It says:
The European commission is investigating complaints about the tax advantages enjoyed by some of the leading online CD and DVD retailers in the UK, including Play.com, HMV.com, Amazon.co.uk, Tesco.com and Asda.com.
These companies are among the biggest players in a ballooning home-delivery trade that is depriving Treasury coffers of hundreds of millions of pounds and has helped push many independent music stores out of business.
The tax dodge means online sales of most CDs and DVDs do not attract VAT - after accounting for the cost of delivery from the Channel Islands they are typically sold 10% cheaper than in most high street stores and supermarkets.
The post-Christmas closure of hundreds of Woolworths and Zavvi stores is expected to see e-retailing make further inroads into album and DVD sales this year. The quiet gains in tax-loophole home-delivery orders will far outstrip any improvement in much-hyped download sales.
As it notes:
One of the fastest-growing e-retailers is TheHut.com, founded six years ago by Matt Moulding, a former executive in John Caudwell's mobile phone empire. TheHut.com provides VAT-free CD and DVD home delivery services from its Guernsey warehouse on behalf of Tesco.com, Asda.co.uk and the Co-op online. It will shortly start a similar contract with WHSmith.co.uk and is in talks with Argos.co.uk, one of Britain's largest online retailers.
Many of these well-known high street names have pledged to cut their carbon footprint, but the VAT loophole trade adds a needless 1,000-mile round trip to many goods - sourced in the UK, shipped overseas, only to be sent out to customer's homes across Britain.
Full marks to Richard Allen with whom I have been in much discussion over the last couple of years for keeping this abusive trade in the press.
Full marks to for highlighting the complete hypocrisy of the Treasury on this issue. As the Guardian notes:
In early 2005, Treasury estimates went some way to acknowledging the scale of the problem. They suggested likely losses to the taxpayer from VAT relief were running at £80m a year and warned the shortfall could rise to £200m in a couple of years. More recently, Treasury officials have privately claimed that figure has not been reached, though campaigners insist £200m looks a very conservative estimate.
I'll confirm that last point. And yet note this:
Though they have received repeated complaints from struggling high street retailers, the Treasury and Revenue & Customs have argued the cost of closing LVCR would outweigh any savings. They have also suggested blocking the relief could harm the Channel Islands economies. Officially the trade remains "under close review".
How absurd can they get?
Do we ignore cocaine trading because it helps the Columbian economy?
Do we support other states who help decimate out High Streets of shops?
Do we have any obligation to help the Channel Islands when they have deliberately set out to steal our tax revenues?
Apparently the Treasury thinks we have.
It gets worse:
Despite strong evidence to the contrary, the British government has told Brussels the scale of VAT loophole trading has been exaggerated. A European commission document seen by the Guardian details how the UK authorities claim Jersey has "utilised business licensing laws" to push out online retailers not indigenous to the island. "Jersey has required 17 such businesses that were already established to leave," UK authorities told Brussels officials.
The commission document says: "The effect of these actions, according to the UK authorities, is that there are no known suppliers remaining on the Channel Islands that operated in the 'circular' way described in the complaint. There are only two retailers remaining on the islands that make significant sales of CDs/DVDs to the UK, one being an indigenous Jersey-based company, and the UK authorities understand these to operate as normal logistics hubs fulfilling orders from substantial stocks held in warehouses there."
But the Guardian has 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 LVCR. 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 LVCR.
One regular supplier to Jersey retailers, who asked not to be named, said: "It is ridiculous to suggest warehouses on the island are buying or holding stock levels appropriate for the island's local market. Of course the trade is circular."
Given its remoteness, Jersey would be highly uncompetitive as a "normal logistics hub" without being able to offer LVCR. Play.com and TheHut.com both ship those goods that attract VAT from centrally based warehouses on the British mainland. Only CDs, DVDs and some computer games are shipped from Jersey by Play.com and from Guernsey by TheHut.com.
Cogently and correctly argued.
I have seen other evidence recently of the Revenue blatantly misrepresenting the reality of the Channel Islands to the EU to support their abusive tax structures. It seems that they are undoubtedly doing so here.
So let's ask some real questions:
1) Why is the Treasury dedicated to perpetuating offshore tax abuse?
2) Why does the Treasury persistently misinform the EU on issues relating to the Channel Islands?
3) Why is the Treasury willing to turn a blind eye to tax abuse costing 25% of the total benefit fraud they pursue so vigorously in this country?
I'd appreciate answers.
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“Treasury and Revenue & Customs have argued the cost of closing LVCR would outweigh any savings.”
It’s possible. We’re talking about trying to collect 3 pounds maximum from each individual consumer in a tariff. And it would have to be collected individually. Might it cost more in HMRC time and costs than 3 quid to collect each fee?
Further, we can’t in fact close it. It’s an EU Directive, not simply a UK law. The most we could do is lower the limit to ten euro.
Tim
No problem
Add a £5 handling charge for the Post Office
See how many buy from these places then
Richard
Richard
Surely the answer lies with the legislative draftsmen. Why allow the exemption threshold in the first place ? Once an exemption is created by statute, it suggests that the government is accepting that the tax revenue in question simply isn’t worth collecting in the first place, in which case they are hardly like to bleat when that tax is lawfully avoided directly as a result of that statutory exemption having been created.
Is there really any tax leakage if £3 of waived VAT costs more than £3 to collect ?
David
Yes – of course there is tax lost
And there are jobs lost
And, of course, we could also require that bulk payment be made before import as well – to save the collection fee which would otherwise be paid to the Post Office
Cut the limit to 10 euro and we solve this one
Let’s do it now
For the environment and jobs if nothing else
Richard
Richard
Not sure that I follow your argument. Gross tax lost, yes, but Customs and Excise obviously feel no net loss of tax because of the collection costs of that tax. Why do you think that de minimis exemption was introduced ? It certainly wasn’t the offshore islands who introduced the de minimis exemption.
I know that not all of them use the Royal Mail’s services for shipments from the islands (which in any event doesn’t operate within the islands) so I can’t see that your suggested solution would work. The only thing that would work to be to end the de minimis exemption but that takes us back to why it was introduced in the first place.
Richard
I can see a loss of gross tax revenue, but not so sure about net tax revenue HMRC themselves have calculated that it wouldn’t be cost-effective to collect the VAT below the de minimis exemption level that they set. I assume they know the cost of collecting their tax revenues.
Jobs lost ? Maybe, maybe not. Jobs have been created offshore to exploit the pricing opportunity, but if that pricing opportunity wasn’t there, would extra demand for the same products from onshore retailers at the higher price create the same number of onshore jobs ? Isn’t that an elasticity of demand question ? We simply don’t know the answer.
The Post Office isn’t the answer. Many of them use private delivery services and the UK Royal Mail/Post Office does not operate in the Channel Islands.
The only apparent solution is to eliminate the de minimis £18 exemption, but that takes us back to the question of why it was introduced in the first place. It certainly wasn’t the Channel Islands governments who created that exemption !
Richard
Apologies – I apprear to have repeated myself. I lost computer power when sending the first comment and it looked like it hadn’t been sent.
David
We know that this is a tax abuse. Shall we start from there? We know it is exploiting a loophole. We know it is distorting markets. We know that is harming smaller retailers. We know that is costing UK jobs. These are givens: facts.
we know we can apply it to all who deliver parcels from the Channel Islands etc. No problem.
We know we could instead require bulk pre-payment by the despatcher.
We know we can reduce the exemption limit.
We know the UK had a role in creation of that limit on behalf of the Channel Islands flower trade.
So let’s tackle the issues, not the excuses shall we?
Richard
Why pick on the Channel Islands?
The de minimis exemption applies to shipments into the EU from outside the EU!
This is no big deal and it is better that the consumer is able to purchase items like CD’s and DVD’s instead of downloading them illegally. So it goes further than the loss of a small amount of tax, it is the producers of the product which must be taken into account and they benefit from this industry.
I purchase DVD’s online and Richard is saying here that I should be paying more for that item. If I was to pay VAT on small amounts like this I wouldn’t bother buying them at all.
Richard
Your arrogance in item 8 above really doesn’t do you any favours. Is something fact just because Richard Murphy says its fact ? How do you know that it is costing jobs ? What research have you done ?
Its NOT a loophole ! Its a specific exemption limit deliberately introduced by the EU.
Actually for what its worth I don’t like that fulfilment industry at all and have no reason to try to defend it, but I think you are barking up the wrong tree as to why its apparently such an issue. If its a problem then simply scrap the de minimis exemption and those businesses will either survive or die, but the very reason for that de minimis exemption will remain – its not cost effective to deal with the resulting collection of VAT of such tiny amounts.
David
I wasn’t arrogant for one moment
I stated a fact. Thousands of jobs in DVD and related sales have been lost at Zavvi and Woolworths and you say this have nothing to do with it
This is economic reality
And let’s be clear – the EU did not introduce this rule for this purpose – on line sales did not exist when it as introduced. So it is a law being blatantly used for an unintended purpose. That is a loophole.
And of course I am entitled to talk about it, ask for it to be removed and to close down the abuse that Jersey, Guernsey and for reasons nest known to it, the UK Treasury.
permits
That is my democratic right
And the evidence is compelling enough to get it in national newspapers
And so far I have not heard one counter argument from you or anyone else that justifies this behaviour
Why is that?
Richard
Richard
Its hard to take you seriously! Woolworths and Zavvi went bust due to online sales from offshore ? Rubbish. They managed to compete well enough before the recession. Woolworths sold thousands of lines of stock which aren’t available from the offshore fulfilment houses! Didnt Zavvi go bust because their own related supplier go bust ? The only “economic reality” and “fact” exists in your blinkered mind. Those jobs were not lost because of offshore fulfilment. They were lost because the businesses were no longer viable. How much offshore fulfilment do you think actually goes on? Every town in the UK will have had a Zavvi and a Wpplworths selling large volumes of CDs, DVDs etc. The offshore fulfilment houses would be requiring warehouses greater in size than the land masses of the entire Channel Islands to have been selling enough volume to cause the level of impact to which you refer !
Its irrelevant that selling online didnt exist when the exemption was introduced. The world continually changes and the exemption could have been ended at any time. So why wasnt it??
David
Zavvi was supplied by Woolworths
How much offshore fulfilment – it’s massive
How is it done – by packing the order in the UK – sending it to Jersey and posting it
Let’s be clear – the stock is not in Jersey
That’s how it’s done
It’s just your blinkered view that let’s you deny the truth
Why hasn’t it been changed? Because The Treasury is petrified of having to bail out Jersey
But the reality is it will have to sometime soon
Richard
Richard
Sorry – a waste of time arguing with you on this one. You can’t accept my view and I can’t accept yours.
But I’m not defending the offshore fulfilment industry…merely stating that I don’t think that your analysis of its cause and effect is at all accurate.
David
You have not tried to argue
What is your argument apart from self interest?
Richard
Richard
I have no self-interest whatsoever in the offshore fulfilment industry. If you actually read what I said, I don’t support the offshore fulfilment industry. However, as usual you only read what you want to read.
And I HAVE tried to argue. I have argued that the de minimis limit was obviously introduced because it is not cost-effective to collect the low amount of VAT on each item and that there is no evidence that this has changed. I have argued that you have no evidence that jobs have been lost as a result of the offshore fulfilment industry.
Your stance is beyond belief. You even manage to argue about what we are arguing about !
I have never read such a load of rubbish in ages. We are taxed enough in the Tax Justice Networks now wants us to pay VAT on petty amounts to purchase a DVD. I am thinking of leaving the UK, there is too much tax to pay and they waste this money. Why doesn’t the TJN concentrate on Government thrift for a change and then there wouldn’t be a need for offshore finance centres.
To David. I have 20 years in the music industry managing a major band, running an online mail order company and dealing with all the issues surrounding downloads (the emperors new clothes…I just called an associate who runs a large label 6% – 8% of their revenue is downloads). I know most of the players including MDs of major distributors who supply offshore retailers . I can tell you that what Richard Murphy is saying is correct . The cost of collection of the VAT is a non-issue. Firstly anyone running a mail order company knows that if customers have to swallow the inconvenience of a handling charge and a delay in customs, they won’t order the items. Impose the rules and the trade comes back on shore. This is fact that the know it all suits in The Treasury who haven’t sold a record in their life don’t understand. Secondly every sale made offshore replaces a sale that would have been made onshore. Thirdly yes this is also happening from other locations so ban it from there as well (I know a company that does the same thing selling CD’s and DVDs back into the UK mail order) Finally there are many different types of music consumer from the casual buyer to the obsessive. It is the turnover of back catalogue that keeps the record industry alive and most buyers will buy an album at the cheapest price available to them. Some people might not buy something if its cheap and steal a copy instead but that has always happened. I did it when I was younger. However not everyone thinks like that. Most will buy the cheapest available but if Cheap means £12 they wil still buy it. Radio head sold 100,000 sets of their album at £40 each. I’m involved in a project ltd to 3000 copies elling at £75 each. I am 45 I still buy CD’s and yes VINYL. Downloads have no transferrable value (a second hand value) and do not become collectable and increase in value (like antiques) They are a worthless rip off. Only idiots buy them in bulk. I have never met anyone with a large download collection that thay paid for. I have albums on CD worth hundreds of pounds. Yet again the suits in The Treasury don’t understand how music purchasers think. We don’t all buy Artic Monkeys downloads like Gordon Brown (if anyone believes that rubbish) So essentially I know more than you and I’m telling you jobs have been lost, compoanies have gone under sales have gone offshore. I know as I know the people involved. Satisfied ? Richard Allen
That conmpany I said doing the same thing as companies in Jersey/Guernsey is based in the USA
One more thing. When Virgin became Zavvi they were offered an offshore fulfilment operation by EUK part of the Woolworths Group. Zavvi decided to ditch the old Virgin buying Team and have EUK do all of it. EUK serviced the Zavvi website and the Zavvi stores. When Woolworths went under it dragged down EUK (who were profitable had they been on their own) This meant that in the weeks before Xmas Zavvi lost their offshore website and their buyers and store fulfilment. I havew a screen shot of the Zavvi website telling customers they were unable to supply them. This situation was was terminal for the company as the shops couldn’t survive on their own with no buyers or stock (all the warehousing was with EUK). Zavvi were left dead in the water….so yes the offhore tax loophole killed Zavvi. This was not reported in the press correctly as the press said EUK were the sole supplier to avvi (rubbish as there is no such thing as a sole supplier in the music retail industry…you have accounts with hundreds of suppliers)
Heres more. I have a long lost document from HM Revenue and Customs in my hands (1997 – now in the hands of the EU) which categorically states that the deminimus limit was introduced to The Channel Islands to “expedite the transit of perishable goods through the mail”. Any other reason put forward is bull. FACT.
“Sara wrote:
I have never read such a load of rubbish in ages. We are taxed enough in the Tax Justice Networks now wants us to pay VAT on petty amounts to purchase a DVD. I am thinking of leaving the UK, there is too much tax to pay and they waste this money. Why doesn’t the TJN concentrate on Government thrift for a change and then there wouldn’t be a need for offshore finance centres”
Sara – If you built up a business for 20 years that was put out of business by this kind of tax abuse or even worked for a company put out of business by it then you might understand what the issue was about. Rather than be one of the rats leaving the sinking ship why not try and fix it ?
Leaf wrote:
“Why pick on the Channel Islands?
The de minimis exemption applies to shipments into the EU from outside the EU!”
Quite right. The same abuse happens elsewhere outside the EU The fact is that most abuse come from Jersey and Guernsey but you are right any destination used to avoid VAT and undermine UK traders should be dealt with. It will be.
Tim Worsthall said : “Treasury and Revenue & Customs have argued the cost of closing LVCR would outweigh any savings.”
It’s possible. We’re talking about trying to collect 3 pounds maximum from each individual consumer in a tariff. And it would have to be collected individually. Might it cost more in HMRC time and costs than 3 quid to collect each fee?
Further, we can’t in fact close it. It’s an EU Directive, not simply a UK law. The most we could do is lower the limit to ten euro”
Obviously written by a economist and not a businessman and also someone who never reads EU law. The directives concerned have ample text covering abuse by mail order and make it very clear that the relief should not be allowed if the main intent is abuse or tax avoidance. Read them and you’ll see. Just because someone is driving over the limit doesn’t mean its legal.
But surely these companies cannot be based in the Channel Islands shipping huge quantities of UK product back into the mainland of the UK for any tax avoidance reason ? No surely they are doing it because of the convenient location of the Channel Islands to the UK mainland off the coast of France! Wake up!
As for the cost of collection myth, any business faced with customers who might pick up a customs charge and a delay would not be in Jersey and Guernsey handling millions of transactions for their UK mainland customer base (we are talking about deliberate mechanised tax avoidance here on a vast scale not the odd package from non-EU destination which is waht the reief is intended for). If a collection charge was introduced Internet retailers in Jeresy and Guernsey reliant on the UK mainland market for re-imported products would have to move to the UK mainland or make their millions on the vast customer base in Jersey and Guernsey. Either that or give up – preferbly the latter scenario for anyone on the UK mainland in competition.
Not everything in economics is a simple supply and demand curve.
Having worked at EUK I can tell you that EUK WAS the sole supplier to Zavvi, and the reason zavvi went bust is because EUK did. The reason EUK went bust is the banks refused to support a profitable business after Woolworths, our parent company, went bust. Offshore fulfilment genuinely was not related.
That’s not to say that the argument about whether it should be allowed isn’t valid, but the demise of EUK and Zavvi shouldn’t be used to validate either side.
I’ll think you’ll find following the trading restrictions imposed by the Jersey Government just about the only companies still trading in CDs, DVDs etc are owned by Jersey residents.
Are they not entitled to run a business like anyone else in the World?
BUT, the ones that need to be looked at are IndigoStarfish/Amazon and The Hut/ASDA. How they still operate is a mystery.
EUK were offering offshore fulfiment to UK companies so it is related as EUK were fulfilling not only the Zavvi shops but also the website offshore. It was all part of the same chain, a move that proved to be unwise (all the eggs in one basket) as subsequent events proved. Yes Jersey companies are the ony ones left in Jersey but UK company’s sold out to Jersey residents to keep going . There’s more than one way to skin a cat or avoid a tax.
Of course companies and those that can will make use of low-tax jurisdictions (zero corporation tax etc). There isn’t a problem with this in a global economy.
Customers importing goods from outside the EU under the VAT threashold are entitled not to pay VAT. There isn’t a problem with this.
The problem is that there are high tax jurisdictions.
If VAT and other taxes in the UK and EU were lower this would go away.
Agreed but are we seriously thinking of campaigning to remove VAT ? Its a bit like trying to stop wars by banning weapons. Good idea but I won’t live long enough to see that happen …. Whilst VAT exists and under the EU laws that control it member states have the duty to protect those that pay it from those that avoid it. The only reason this isn’t happening is that our Government refuses to do exactly that…. They could stop this particular scam tomorrow. What’s bad about VAT avoidance is that it affects everyone in business directly…unlike other obscure taxes which do not have such a direct effect. I live in the UK which decided to join the EU and charge us all VAT. If they want to do that then they have to make sure that as a result of that I don’t suffer from those avoiding the VAT as a result of something THAT THEY ARE IN CONTROL OF.
“Customers importing goods from outside the EU under the VAT threashold are entitled not to pay VAT. There isn’t a problem with this”.
Not true. This right is governed by LVCR a relief that is only allowed in certain circumstances. It is only allowed if it is not being used as a vehicle for avoidance, evasion or abuses or distorts cometition in the home market. It’s in the legislation that the UK Government ignore. If you order a UK licenced product (a DVD for isntance with a BBFC Certificate) and you are ordering it from a location outside the UK in order to gain a VAT reduction that does not satisfy the legislation as the product has been shipped offshore in order to facilitate your tax avoidance. Its an artificial arrangement that abuses the relief.
@Tim Worstall
This is rubbish and shows a complete lack of knowledge of the directive.
No mystery there. The UK Government applies the directive incorrectly and turns a blind eye to help the channel Islands economy.
@Anon
Not quite true. Zavvi decided to farm out all of their fulfillment and buying to EUK because EUK were handling their offshore website so it made sense to have one company do everything (saves a bit of money). Then Woolworths went down,taking down EUK and Zavvi had no fulfillment or buyers only weeks before Xmas. I don’t believe Zavvi would have given everything to EUK if they didn’t have an offshore website. So it is related…
There is no doubt that the LCVR relief which was meant to be a pragmatic response to the cost of collection is being exploited in a way not intended by the EU but let’s face it this is nothing compared to the massive tax “avoidance” that goes on through the Channel isles and other off shore juristictions. On-line retailing is a low margin high volume business so these players really have no choice, go offshore or get out of the business. If we all abolished the secondary and grossly unfair tax of VAT -which clobbers the low paid-they spend all their income- then this wouldn’t happen.
@joseph
Yes of course. You can’t blame the retailers. And yes other tax avoidance is bad for all of us (particularly now)which makes the fact HMRC did nothing when they were warned about this 10 years ago – when the offshore trade was small – all the more distasteful. As for scrapping VAT…well that’s another debate. I don’t know about you, I’d rather have a fair unpopular tax than an unfair unpopular tax. I know many people who lost their jobs because of this particular scam.
@Richard
The idea of scrapping VAT has been raised a number of times (mainly by those with an interest in The Channel Islands) Its a bit like saying lets ban war to stop world conflict. Nice idea but sometimes you are already being shot at.