Jersey and Guernsey: the VAT abuse continues

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The Jersey VAT issue I noted here very recently appeared in the Observer today:

The billionaire Barclay brothers are poised to join a fast-growing band of retailers exploiting a controversial Channel Islands tax loophole in order to sell VAT-free CDs, DVDs and video games over the internet, undercutting prices in struggling independent high street stores and depriving the Treasury of millions of pounds in lost revenues.

The planned move comes after Treasury minister Stephen Timms privately assured struggling high street businesses unable to compete with offshore websites offering VAT free prices, that there are "only two major exporters in the audio visual market in the Channel Islands".

In fact, contrary to Timms' claim, all household-name CD and DVD retailers - including HMV, Amazon, Play, Tesco, Asda, Argos and WH Smith - run substantial "free home delivery" internet export operations from Jersey or Guernsey in order to exploit the tax advantage. An Observer investigation has found a Scottish government quango is even a shareholder in one of the most established VAT loophole companies.

The article goes on to note that:

According to market research firm TNS, 28% of DVDs purchased by customers in Great Britain are bought on the internet. The figures for CDs and games are 23% and 25% respectively.

The Barclays get in on the act like this:

Shop Direct, the Barclay brothers' mail order empire, which includes Littlewoods, Great Universal and Kays, will this month - possibly this week - start offering VAT-free products on its Woolworths website, acquired from administrators earlier this year after the high street store chain went bust. Sir David and Sir Frederick, proprietors of the Telegraph newspaper titles, are Channel Islands residents for tax purposes.

The Observer has not taken Timms assurances at face value:

Timms [has claimed]: "There are now only two major exporters in the audio visual market in the Channel Islands, and one of these is a company indigenous to Jersey, over which the UK government has no jurisdiction." But an Observer investigation has found all but one of the companies involved in the VAT dodge, are controlled by UK-registered parent businesses. Maidenhead-based HMV Group and Swindon-based WH Smith, both stock exchange-listed, push much of their online sales through subsidiaries HMV Guernsey and WH Smith Jersey.

Amazon has an arrangement with Indigo Starfish, a Jersey company owned by Glasgow-registered parent Indigo Lighthouse, while Tesco, Asda, Argos and WH Smith have struck outsourcing deals with Cheshire-based The Hut, which operates through Jersey and Guernsey subsidiaries.

The only genuinely Channel Islands-owned company using the VAT loophole is Play.com, founded by Jersey islanders Richard Goulding and Simon Perree.

Scottish Enterprise, a government quango, became a shareholder in Indigo Lighthouse after investing in 2004. Asked about the investment it said: "We are pleased with Indigo Lighthouse's contribution to the Scottish economy."

Clearly they have a  flexible interpretation of where Scotland is. Maybe they need country-by-country reporting.

It’s curious that the Observer concludes:

[A] senior tax partner at one "big four" accountancy firm, who asked not to be named, said this argument [that it would cost more to collect VAT on these imports than it was worth] was increasingly untenable. "It [the EU directive] is being used in a way that was not envisaged and the Treasury really needs to take another look," he said.

Quite right.

This problem could be solved overnight. If every packet from Jersey and Guernsey was opened to check values were under £18 and a £5 handling charge for doing so was levied on all who received those packets then the market would be closed in days.

The threat would be enough to ensure that Jersey and Guernsey could instead be required to ensure that VAT was charged on all goods shipped from them to the UK irrespective of value if the goods had been previously shipped into Jersey in substantially similar condition. I know substantially is open to abuse, but if it was made clear that in the case of recorded media any form of repackaging did not constitute a change in the state of previously imported recorded media this abuse (for it is nothing else) would be stopped.