A legal challenge to VAT abuse – getting closer

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It's not my usual policy to reproduce press releases, but on occasion it seems appropriate.

The following was issued by the Forum for Private Business yesterday and makes clear how close a legal challenge to the VAT loophole that is being exploited by retailers making sales of items worth less than $1`8 each in Jersey now is:

VAT loophole investigation by the EU must be thorough says FPB as 6 March deadline looms

The Forum of Private Business (FPB) is welcoming an investigation into the exploitation of Low Value Consignment Relief (LVCR) through off-shore locations such as The Channel Islands. The large scale usage of LVCR by a number of major online retailers is commonly referred to as the VAT Loophole. The business lobby-group is demanding a thorough examination of the facts after European Commissioner for taxation, Laszlo Kovacs, instigated an inquiry following pressure brought to bear by the FPB. The FPB wrote to the European Commissioner in November 2006 to urge him to start infraction proceedings against the UK government. The government has so far delayed in correctly implementing the EU directives surrounding the relief, which allows importation of goods worth up to £18 into the UK, without the imposition of VAT. Following detailed legal advice, FPB's European spokesman Martin Smith believes there has been a clear breach of obligations under EU law.

"The law states that LVCR should be disallowed if it is used for tax avoidance or distorts the local market in favour of any particular retailer. The Government has taken no action to act against clear tax avoidance and neither has it done anything to alleviate distortions of competition caused by VAT free goods entering the UK by mail. Meanwhile businesses are continuing to suffer."

The loophole has been exploited by retail giants such as Amazon and HMV giving them an unfair advantage over competition operating from the UK mainland who can't compete with their artificially low prices. In many circumstances goods are being manufactured in the UK, sold online, shipped to the Channel Islands, and then posted back to a UK purchaser without the extra cost of VAT. The European Commissioner's Infringement Unit has now commenced an investigation into the legal issues at the instruction of Mr Kovacs.

FPB member Richard Allen is the Managing Director of Delerium Mail Order Limited, an online CD and DVD retailer in Buckinghamshire. He says so far the evidence has been ignored by government.

"The Chancellor has failed to grasp the nettle on a number of occasions. Around £90 million pounds was lost in tax revenue in 2006 and millions more were lost by small firms who can't afford to slash their prices in order to compete. I hope that the investigation carried out by the taxation unit is more thorough than the UK government's which to date has been totally out of touch with what has been happening in the market"

Mr Allen owns one of a number of CD and DVD firms threatening Gordon Brown with Judicial Review unless action is taken to close the loophole. They wrote to the Chancellor in January 2007, giving him two months to take action and are prepared to instigate the legal challenge from 6th March 2007. Mr Allen says they are prepared to take matters into their own hands.

"Whilst the UK government dithers high street retailers are going to the wall. We are not prepared to standby and watch. The investigation by the European Commissioner must look at the real facts and not the myths and confusion about increases in music downloading"

Paul Quirk, chairman of ERA the Entertainment Retail Association (ERA), welcomed the actions being taken to try to close the VAT loophole as it has affected "all ERA members large and small who trade on the high streets of the UK". He continued by stating that, "many independent stores had closed due to the continued downward pressure on the price of CDs and DVDs" and attributed the Channel Island situation as being "partly responsible for that drop in revenue". He added, "All ERA wants is a level playing field for all its members and it is up to the government to ensure that happens."