Jersey and Guernsey are costing the UK £110 million a year in VAT – and the Treasury is turning a blind eye

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There was an adjournment debate on the VAT abuse being facilitated by the Channel Islands last night ion the House of Commons. This was said:

Specifically, in European law, where low-value consignment relief is available, it must be applied in a way that ensures that it does not give rise to any evasion, avoidance or abuse, or a distortion of competition on the United Kingdom market. Indeed, directive 83/131 makes it clear that the power of member states to allow LVCR is subject to the above two conditions. The fourth recital provides:

"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".

Article 1 provides that

"the Member States shall apply the exemptions laid down in this Directive under the conditions fixed by them in order to ensure that such exemptions are correctly and simply applied and to prevent any evasion, avoidance or abuses."

The UK is also under a general obligation to administer the VAT system in accordance with the general principles of the sixth directive. As the Court of Appeal affirmed in HMRC v. IDT Card Services Ireland in 2006:

"the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of distortion of competition are general principles of the Sixth Directive."

The distortions to trade in terms of the tax advantages are significant and are contrary to European law, and it is incumbent both in the sense of natural justice and in terms of legal obligation for the United Kingdom tax authorities, rather than those of Jersey and Guernsey, to ensure compliance with the law.

Stephen Timms replied for the Treasury saying, amongst much waffle, that:

We estimate that, for 2008, the amount of VAT exempted by the relief was £110 million.

A large proportion of goods that benefit from the relief are supplied from the Channel Islands.

And he then proceeded to argue why despite the point he had just conceded that Channel Islands were killing the trade when the evidence was to the contrary and the fact it was VAT free was the only reason it was there.

When it comes down to it it is clear the Treasury are supporting Jersey and Guernsey on this one.

But then, Gordon Brown has for a long time been the biggest friend the world's tax havens have - and it looks like he is not changing his spots.