Guernsey » Tax Research UK

The Channel Island and Low Value Consignment relief – getting the facts straight

Guernsey, Jersey, Uncategorized, VAT 15 Responses »

Sep 222011

There was a recent discussion on this blog about the history of Low Value Consignment Relief – the VAT system that has been systematically abused by companies round tripping goods with a value of less than £18 into the Channel Islands for almost immediate return to the UK without VAT being charged.

Richard Allen, who has done more to campaign against this abuse than anyone, sent me a note as a result, and I think it well worth sharing as it sets out all the facts on this issue. I reproduce it here with his permission:

With the recent sale of Play.com, the stalled floatation of Thehut, the failed sale of Healthspan and the sale of Moonpig.com I am sure many of your readers may have come to the conclusion that the sale of these Channel Island based retailers may have some connection to the UK Governments announcement that it intends to end the abuse of Low Value Consignment Relief later this year. For what seems like an eternity now online retail in the UK has had to quietly suffer a growing market distortion caused by the abuse of this EU import VAT relief. The resulting market distortion has gradually pervaded every aspect of music retail ballooning like a giant oppressive elephant that nobody wanted to admit was crushing the very life out of our long established UK music retail. Over time UK music retail merrily skipped off to Jersey and Guernsey leaving those retailers unable to make the same journey, to their VAT enhanced demise.

LVCR, contrary to the popular myth was not introduced to help the horticultural industry. That myth has arisen due to the fact LVCR was confused with the VAT prepaid scheme that was introduced to help the Channel Islands horticultural industry in 1973. This prepaid scheme allowed Channel Islands companies to prepay VAT in advance, originally with VAT prepaid stamps but later through a computerised system. Another urban myth concerning this trade is that LVCR was introduced to help the Channel Islands economy. Neither of these assertions are true and the simple fact is that LVCR is an administrative relief intended for the use of member states to reduce their VAT collection costs. It would be entirely illegal to apply it for the benefit of the Channel Islands as that would be an abuse contrary to the EU Treaties and its purpose.

What went wrong with LVCR and the Channel Islands is that since it is an administrative relief and since the Channel Islands already had a pre-paid VAT scheme the application of LVCR in 1983 was entirely unnecessary. There was no administration to be relieved since VAT was pre-paid and there was no cost for the collection of VAT. Today the entire pre-paid system is computerised and even more efficient.

It was clear from the very start that the position of the Channel Islands – an English speaking territory with UK currency – within the EU free trade area and within the UK postal system would probably result in the abuse of LVCR. The LVCR directive allows member states to exclude mail order goods and it would not have been difficult for the UK to have excluded the Channel Islands from LVCR right from its introduction in 1983, since VAT could have been collected at no cost with the existing pre-paid scheme. Quite why LVCR was allowed to the Channel Islands is a mystery. I’m sure the current abuse was deliberately engineered allowing the Islands fulfilment industry, which at that time thrived on cheap subsidised postage, to gain a further advantage from its introduction.

For many years the use of LVCR to avoid VAT was a well kept secret and flowers and plants already in free circulation in the EU were being exported to the Islands from the UK and other EU locations (mainly Holland) so they could be sold by mail order VAT free back into the UK. The 1997 HMRC VAT Assurance Review of Channel Island Goods reached the staggeringly unsupportable conclusion that nobody would circular ship goods via the Channel Islands to take advantage of LVCR because it would not be viable! Exactly how this document reached this ludicrous conclusion is unclear but no doubt somebody with an interest was exerting influence. I understand that the Channel Island Postal services regularly wined and dined senior UK civil servants.

By the late 1990s Play.com had taken advantage of LVCR and the cat was out of the bag. A fairly well kept secret was now becoming common knowledge. By 2005 the practice was so widespread and so out of control that the market distortion it was causing in the UK was forcing everybody offshore. At this point the UK Government really should have acted and removed LVCR from the Channel Islands… but they didn’t because it was politically embarrassing to have to end it (voters like cheap CDs).
Another urban myth is the suggestion that the UK will lose money if LVCR is removed. This incorrect and misleading statement has been propagated by The Channel Islands and incredibly by the previous UK Government. Firstly nobody bothers sending much over £18 from the Channel Islands anyhow since the fraud is now so sophisticated that items over £18 are shipped from a UK warehouse. Why would anybody send an item that had VAT due on it on a round trip via the Channel Islands to a UK customer? Secondly if LVCR is removed and all VAT is prepaid in the Channel islands under the pre-paid scheme, then there is no cost of collection and no loss of VAT. It is only the existence of LVCR abuse that is losing VAT and the market distortion it has created has skyrocketed the loss of VAT over the last 15 years. Originally only a small amount of VAT was lost as the result of a few horticultural retailers scamming the system but now a vast amount is lost as a result of every major retailer in the UK having located to the Channel Islands. How can that possibly be a cost benefit to the UK ?

The main effect of the removal of LVCR will be the collapse of the Channel Islands fulfilment industry because there would be no reason you would want to fulfil anything from the Channel Islands as there would be no advantage to it. I’m sure there will be few tears shed over that. Once the deliberate circular shipping has been ended there would be few packages for HMRC to inspect. More importantly the cost advantage arguments have always been based upon the argument that LVCR can only be altered unilaterally i. e . not just for The Channel Islands but from all locations outside the EU. That is not so, as I will explain.

The LVCR directive was first introduced because member states wanted the option of excluding low value imports from VAT if the cost of VAT was greater than the cost of collection. However in giving member states of the EU the right to exempt items from VAT the EU included in the LVCR directive a non-discretionary obligation (Article 1) for member states to prevent LVCR from being abused by retailers wanting to evade or avoid VAT. Mail order goods are specifically highlighted in the directive and member states are allowed to exclude them. The result of allowing evasion and avoidance is distortion and in the recital to the LVCR directive the member states obligation to prevent evasion and avoidance is put in context; “whereas the exemptions on importation can be granted only on condition that they are not liable to affect the conditions of competition on the home market”. This sentence on its own is not an obligation however the overall result prescribed by the directive is clearly an obligation. The intended prescribed result of the LVCR directive is the application of an administrative exemption from VAT on low value imports into the EU that is not likely to affect adversely the conditions of competition on the home market. That result has clearly not been reached in the case of the Channel Islands where LVCR has been abused for many years and to an extreme degree seriously damaging competition on the home market.

There is a myth that Channel Islands retailers like to circulate which argues that the UK could not just remove LVCR from the Channel Islands as it would be illegal. If LVCR were being applied correctly and circular shipping was not taking place then that could be argued. However circular shipping is taking place and on an industrial scale and LVCR is being abused by mail order from the Channel Islands. Because of that blatant abuse the UK is perfectly within its rights to exclude the Channel Islands mail order goods from LVCR in order to uphold its obligation to prevent evasion avoidance and abuse. My understanding is that the EU has clarified that point to the UK and reading the legislation it seems clear that such an action would be entirely legal and justified.

The basis of the complaint that RAVAS put into the EU Commission in 2007 was that UK Government had failed to prevent LVCR being abused. It took a while to work its way through the system and deal with the inevitable denials but in the end the evidence was overwhelming.

Hopefully we are about to see the end of LVCR abuse although the current abuse of LVCR in relation to platforms such as Amazon Traders and eBay also needs to be addressed. It’s about time the UK Music industry worked with the UK Government to prevent VAT avoidance being used as a method of competition. As we have seen its ultimate effect is to devalue the product and reduce margins to unsustainable levels.

Ultimately by working with and supplying tax avoiders both distributors and record labels only have themselves to blame. The tears shed for HMV by major record labels who are supplying TV advertised offshore tax avoiders are hard to take seriously and the resultant negative effect on UK retail should hardly be a surprise.

Regards

Richard
RAVAS

VAT consignment relief and the Channel Islands – it’s time for the final whistle

Guernsey, Jersey, Uncategorized, VAT 32 Responses »

Sep 162011

It seems worth reproducing the following exchange from Hansard this week in full:

Jonathan Edwards: To ask the Chancellor of the Exchequer what assessment he has made of the potential effects of the provision of low value consignment relief on entertainment products sold by mail order from the Channel Islands on independent high street entertainment stores. [70987]

Mr Gauke: We have not performed an assessment but we are aware of the impact on high street stores, and the Exchequer. The Treasury is currently considering further measures to stem the impact of LVCR.

Jonathan Edwards: To ask the Chancellor of the Exchequer whether he plans to remove low value consignment relief for(a) music and (b) other entertainment products sold by mail order from the Channel Islands. [70989]

Mr Gauke: The Government have not finalised their plans for changes to the low value consignment relief for goods imported from the Channel Islands at this time but is reviewing options.

VAT: Entertainments

Jonathan Edwards: To ask the Chancellor of the Exchequer what discussions he has had with (a) the European Commission,(b) multiple retailers and (c) independent stores on the effects of low value consignment relief on (i) music and (ii) the general entertainment industry. [70988]

Mr Gauke: The Government have been in contact with the European Commission to discuss their options to restrict the low value consignment relief and has received representations from a number of trade sectors affected by LVCR. Ministers are now reviewing what options are open to the Government to make further changes to LVCR.

VAT: Imports

Jonathan Edwards: To ask the Chancellor of the Exchequer what estimate he has made of the revenue foregone by the Exchequer due to the provision of low value consignment relief in each of the last five years. [70990]

12 Sep 2011 : Column 1045W

Mr Gauke: The estimate of the revenue foregone by the Exchequer due to the provision of low value consignment relief in each of the last five calendar years is as follows:

Loss of VAT (£ million)

2006 90

2007 100

2008 130

2009 140

2010 130

For consistency and ease of comparison, the figures in the table assume a constant standard rate of VAT of 17.5%. The actual cost for 2009 is slightly different from these figures reflecting the temporary cut in the standard rate of VAT.

The position is clear, massive, organised abuse is going on.

I’ll tell you – although Gauke is not doing so – that the EU has said the UK has carte-blanche to act to stop this abuse altogether – so the only question now is when will they do so?

The Isle of Man’s VAT abuse has been stopped. Now this one needs to be closed too.

Yes I know it has consequences for Jersey and Guernsey. But that’s something they will have to come to terms with. Promoting tax abuse is not the basis for an economy, and they should have realised that by now. The message has been spelled out loud and clear.

So, when are we going to get an announcement? That’s the only question left.

Jersey, The Isle of Man and Guernsey

Guernsey, Isle of Man, Jersey 11 Responses »

Sep 152011

The EU Code of Conduct on Business Taxation group met in Brussels this week to consider the measures Jersey and the Isle of Man are proposing to take to make their tax systems compliant with EU requirements following their being ruled unacceptable last year.

I will not relate the story of that unacceptability at length: suffice to say that the EU deemed that the corporation tax systems of the islands failed three of the five code requirements.

Removing what might be called the ‘deemed distribution’ requirements (ARI in the Isle of Man) was hoped by the islands to be enough to get round the problem although I had suggested a third problem remained.

Well, as it turned out the EU has accepted the abolition of these provisions subject to some pretty significant assurances, and with a sting in the tail (of which more in a moment). The condition is that deemed distribution is not reintroduced using general anti-avoidance legislation. It won’t be, the islands say. Now I have seen documents presented to the meeting via my usual sources in Europe I note that Wendy Martin for Jersey said, for example:

In summary, the general anti-avoidance rule cannot in our view replicate the effects of the deemed distribution and attribution rules. It cannot apply in such a way as to result in the profits of a company being taxed in the hands of the shareholder in the absence of a properly taxable dividend. It also cannot apply in any circumstances other than in respect of highly artificial and non-commercial transactions.

Which curiously gives carte blanche licence to Jersey local people to use companies to avoid tax, something Colin Powell said they could not afford to do, which is why he was not worried about it:

Outside the finance industry many general traders are branches or subsidiaries of UK companies and so are not affected by the removal of these provisions. Local traders face significant competition from external suppliers and even when their profits were subject to tax at 20% (prior to the introduction of zero/ten) the tax revenues generated were a relatively small proportion of the total. Even absent the low investment income climate that currently exists and which might otherwise provide an alternative source of income, many of the local traders rely on the income from their businesses as the main or sole source of funding. It is likely therefore that even if they did incorporate their businesses they would need to extract the profits in the form of a salary or a dividend.

It’s an odd idea that Jersey says locals simply can’t afford tax avoidance, and an indictnment of the contempt that Jersey offcials hold for the local economy that they can structure their argument in that way.

Despite which Wendy Martin reognised that if any could manage it the opportunities were now legion to do so:

Taking this example further, say the individual built up substantial profit in the company over a number of years and then decided he no longer wanted to run the business. He sells the company on an arms length basis for a profit. There is no capital gains tax in Jersey and so that disposal would be tax free. Effectively the profits that arose in that company would not be subject to tax.

This transaction could not be challenged under the general anti-avoidance provision on the basis that it is a commercial transaction. The main purpose of the transaction, that is the sale of the company, is for the individual to exit from the business and to make a profit – it is not for the avoidance of tax.

In other words, Jersey admits that there is a masive loophole in their tax system now because of the absence of a capital gains tax.

Which is where they and the Isle of Man are now to suffer the sting in the tail – which is that I am told that the EU will be demanding a capital gains tax of them - because its absence now makes their system on-standard in itself.

That should ‘go down well’ in St Helier and Douglas.

And candidly I really do hope they do this to Jersey and the Isle of Man – because remember they both remain out on a limb with these tax systems which have been, I think it fair to say, grudgingly approved. And Jersey remain out on a limb on other issues too – like automatic information exchange under the European Union Savings Tax Directive.

But EU attention might move elsewhere for a moment for what, I might hear you say, of St Peter Port? Well, the EU’s now turning its eyes their way and is asking for evidence of what they’re going to do, which so far seems to be ‘not a lot’.

Cameron and Osborne did the Swiss tax deal to support tax evasion – there’s no other explanation

Cayman, Guernsey, Isle of Man, Jersey, Switzerland, Tax evasion, Uncategorized 107 Responses »

Aug 252011

The UK – Swiss tax deal does not meet with my approval, as some will have noticed. The deal is outlined here. My objections are littered through the blogs preceding this one.

But let’s stand back for a moment and consider why the UK have done this deal – uniquely (because it seems unlikely that the supposedly similar German one will get parliamentary approval and so will not happen).

It’s important to say this deal was not needed. The revised European Union Savings Tax Directive is on the table. Twenty five EU states support it and it has looked very likely recently that compromise with the other two was possible and that Switzerland could have been pulled on board. So deal that would have ensured there was automatic information exchange on all interest income and gains arising throughout Europe, Switzerland, Liechtenstein and the UK’s tax havens was on its way, covering not only individuals but companies and trusts as well and with names and addresses being supplied.

That deal would have ensured we’d have got all the information we needed to demand all the tax due by those who have been criminally evading their tax bills by hiding funds in Swiss banks that have been deliberately and knowingly helping them to do so.

And I think the UK- Swiss tax deal has been deliberately engineered to scupper that EU wide deal because it would have applied to Jersey, Guernsey, the Isle of Man, Cayman and all other British tax havens that comprise the branch offices of the City of London tax haven. And it would also have extended information exchange to companies and trusts – which would have shattered the tax evasion industries in these British tax havens.

So what have Cameron and Osborne done? They’ve as far as I can see absolutely deliberately signed the deal with Switzerland in an effort to destroy that EU deal. Even the FT says this morning:

We’re not experts in this field but we also wonder whether these bilateral deals mark a setback for international efforts, led by the OECD and EU, to force the Swiss into further transparency.

“The UK’s willingness to legitimise secret accounts on a ‘no-names’ basis is controversial because it treats users of secretive havens more leniently than other taxpayers,” notes the FT.

So how should we really interpret this deal?

What’s very obvious it is deliberate move by London. And it’s also very obviously deliberately designed to help tax evaders by making sure that the Crown Dependencies and others can remain in that sordid business.

So we have to conclude that this is not a move against tax evaders – all of whom will be laughing themselves silly about how easy it is to get around this Swiss deal.

In that case let’s not put too fine a point on this: this is the Treasury and our political leaders going out of their way to support criminality by making sure that a measure – the European Union Savings Tax Directive - that would blow tax evasion in British dependencies apart cannot now be implemented. And all, no doubt, at the behest of the City of London.

There’s no other reasonable interpretation for what they have done.

Channel Islands’ VAT abuse can be ended by UK whenever it likes EU says

Guernsey, Jersey, Tax avoidance, Uncategorized, VAT 3 Responses »

Aug 042011

The Telegraph has reported that:

By the end of the year, CDs, DVDs and contact lenses will be among the hundreds of items that customers will no longer be able to buy cheaply via the internet as the government prepares to close the tax loophole that made it all possible, a source close to the EU has said.

As The Telegraph continues:

Up until now, the UK government was concerned about facing possible legal action if it attempted to stop the likes of Amazon, HMV and Play.com from exploiting a legal tax loophole that enabled them to ship goods to the Channels Islands and then back to UK customers minus the cost of VAT.

The EU has now given assurance to the treasury that it is perfectly within its rights to abolish the “abusive and restrictive” trade.

A change to the law that would see an end to the multi-million pound Channel Islands industry could be enacted as early as this autumn.

Exchequer secretary to the treasury, David Gauke, has maintained that he is determined to tackle the problem, although exactly how the EU’s support will manifest itself in UK law remains unclear.

So, now we know: this abuse is illegal and can be stopped without fear of legal challenge or claim for compensation against the UK arising.

And what will he spend the £200 million or so a year he will collect on? Youth services, maybe? Wouldn’t that seem just?

So when will we see action from George Osborne to stop tax abuse, end tax haven activity, support the UK High Street, maintain UK jobs and ensure that the valuable role of UK music shops in offering diversity to consumers is upheld? And what will he spend the £200 million or so a year he will collect on? Youth services, maybe? Wouldn’t that seem just?

No one yet knows the answers to these questions, but full marks to Richard Allen, the businessman who lost his online music company to LVCR abuse and has since led the campaign to have it stopped for getting the whole issue this far.

Channel Islands’ VAT abuse continues

Guernsey, Jersey, Tax avoidance, Tax Havens, VAT 5 Responses »

Jul 212011

From the Channel Online TV:

Online greeting card company Funkypigeon could soon become the latest fulfilment business to set up in Guernsey.

The business is recruiting on the island, but they will not yet discuss why they want to make the move over the Channel.

One reason could be that rules on Low Value Consignment Relief or LVCR mean their goods would be exempt from VAT, but that is not something the States encourage.

Three things are clear:

a) Osborne’s announcements clearly aren’t having an impact.

b) The ‘not encouraging’ stance of the States is toothless.

c) Radical action to stop this abuse is now needed.

Will Osborne deliver? Who knows?

Game ‘is over’ for Crown Dependencies

Guernsey, Isle of Man, Jersey 3 Responses »

Jul 152011

From the Guernsey Press yesterday:

THE three Crown Dependencies are in danger of going bankrupt, tax avoidance campaigner Richard Murphy claimed yesterday.

His comments follow an announcement that the Isle of Man will lose millions in its VAT subsidy after it was forced to change the terms of its agreement with the UK.

Mr Murphy said that the jurisdiction was now in a state of chaos, while Jersey had a deficit of around £80m. in 2010 and Guernsey was using its reserves with no prospect of growth.

‘This [the Isle of Man’s agreement] draws a line in the sand which says the game is over for the Crown Dependencies,’ said Mr Murphy.

‘Each of the islands’ politicians have to work out what they are going to do to sustain their economies and that can’t be on low rates of tax alone,’ he said.

But will they do that? That’s the big question.

Or will it still be ostrich time?

So now we know what the Crown Dependencies are for

Guernsey, Isle of Man, Jersey, Secrecy jurisdictions, Tax Havens 1 Response »

Jun 212011

There was a fascinating comment in the Scotsman newspaper this morning:

David Mundell, Scotland Office Minister, said that any comparison between Scotland and the [Crown] Dependencies was “completely misplaced”.

He said: “They are on a completely different scale to Scotland and their function is also completely different, that of providing a different tax environment. Scotland is an industrial country with an entirely different profile to the Channel Islands.”

So now we know: apparently it is UK policy that the Crown Dependencies provide a ‘different tax environment’.

Official confirmation of all Nick Shaxson has argued in Treasure Islands if ever I heard it.

It had to happen: the campaign to turn Scotland into a tax haven has begun

Guernsey, Isle of Man, Jersey, Scotland, Uncategorized 3 Responses »

Jun 212011

It was, I suppose, inevitable that the SNP’s recent victory in the Scottish elections would set the tax haven enthusiast free to argue that Scotland should join that pariah’s club, urged on by Alex Salmond’s call for Scotland to have the right to set its own corporation tax rate. And that has duly happened. As the Scotsman reports this morning:

Famously, the three islands [that form the Crown Dependencies] have used that autonomy to market themselves as offshore tax havens for the rich, turning them into some of the wealthiest places on the planet.

Their example is now coming under scrutiny, as the new SNP Government in Edinburgh presses ahead with its plans for an independence referendum – which has turned growing attention on to what the Nationalists these days mean by independence. A study by Professor James Mitchell of Strathclyde University proposed that the SNP is now proposing a form of “looser union” with the UK, where it would attain sovereignty but remain part of a “confederation” of British nations. Such a nation would control matters in its own borders, but would buy in services from the rest of the UK where it was deemed appropriate.

The examples of the three British Dependencies fall short of the what the SNP wants for Scotland – full independence. But they are linked into the UK in a way which the SNP also envisages.

So could Scotland follow suit? Ben Thomson, of the Campaign for Fiscal Responsibility, says that the UK should encourage the kind of tax competition shown up by the three territories.

“The game is not about dividing up the cake. It is about how do you attract a bigger cake within the UK by attracting businesses to come here. We in a global game competing against Geneva, Luxembourg or Dublin. If these businesses didn’t set up in the Channel Islands, they would end up in the Cayman Islands or Bermuda.” Thomson says that, given the powers of the Dependencies, a fiscally independent Scotland could set taxes in its own areas of strength – such as oil and gas, or whisky – to suit its own local circumstances.

Thankfully there are voices of reason in Scotland, and some from unlikely sources:

But turning Scotland wholesale into a tax haven would be near impossible, say tax experts. The three islands’ heavy reliance on financial services, and low levels of social need, are utterly at odds with Scotland’s own profile.

Rhona Irving, a partner with PriceWaterhouseCoopers, asks: “How would you replace the tax take if you reduced it to these levels? How would you fund public services? Are you going to attract enough businesses to make up the deficit you would have?”

She’s right – and for once good for PWC for pointing out the glringly obvious fact that the tax haven model is not viable.

In case they haven’t nopticed all the Crown Dependencies are in deep fiancial trouble, unable to balance their books and are in possession of tax susyems ruled illegal by the European Union. But what the heck, why let something like that get in the way of the tax competition mantra?