Why the Channel Islands’ VAT wheeze is illegal and has to stop

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I have been banging on about the Channel Island’s VAT abuse for years.

Labour decided to do nothing about it when in power even though it costs the country at least £100 million a  year – and I suspect somewhat more.

Now the ConDems seem to be turning a blind eye – as I noted  earlier.

And yet the UK government has a duty in law to close down this abuse and the right to do so. The reasoning is his:

Article 189 of the EC Treaty makes a Directive binding on states as to the result to be achieved from an [LVCR] exemption but leaves the form and method to their choice. The Sixth VAT Directive permits exemptions from VAT on importation but requires states to ensure that their method of implementation “prevents any possible evasion, avoidance or abuse” (Sixth VAT Directive (77/388/EEC) Article 14 paragraph 1) It also gives states the option of not granting exemption “where this would be liable to have a serious effect on conditions of competition” (Article 14 Paragraph (d)) This is in line with a fundamental intent of EC law “to promote throughout the Community‚Ķdevelopment of economic activities (EC Treaty Article 2) The Council Directive allows states to exclude goods from such exemptions which have been imported on mail order” (VAT Directive 83/181 EEC Article 22)

I am aware that HMRC have confirmed in writing that:

“if relieving mail order consignments under the relevant provisions of the Sixth VAT Directive and Directive 83/181/EEC affects the conditions of competition within the home market the UK is under a community obligation not to grant the relief.”

So the only question is whether competition in the home market has been affected by Channel Island's VAT abuse. As a recent article in trade magazine Cue entertainment reported:

The rise in VAT in the emergency budget last month has further tipped the balance in favour of the larger entertainment retailers able to take advantage of Low Value Consignment Relief through their Channel Islands operations. Adrian Morrison reports.

The independent music retail sector has been hit hard in recently years. Almost 60% of stores operational in 2000 had closed down by 2009. The sector’s demise was concurrent with the rise of operations such as Jersey-based Play.Com, HMV Guernsey Ltd and others including off-shore supermarket operations.

A recent survey by consumer watchdog Which? found that only 11% of CD buyers purchased from independent record shops. Tellingly, the vast majority of these stores cannot take advantage of LVCR. The other 89% use online retailers, followed by high street chain stores and then supermarkets, which frequently can.

A spokesperson for a high street retailer, which also takes advantage of VAT relief from off-shore operations, said: “If there was a change to the hierarchy and VAT had to be paid, it would not be an issue for us because it would hit people equally and, in fact, would bring online prices closer to our store prices. A level playing field would actually help multi-channel players.” Indicative of the sensitivities surrounding this issue, he didn’t want to be named.

Of curse he didn’t. But I will talk real numbers that show that the trade is having a serious effect on competition – which si the grounds for it being closed. This data comes from ERA - The Entertainment Retailers Association:

INTERNET SALES VOLUMES

2005

Total Internet sales of CDs - 20 million units with a total value of £200 million

Total Internet sales of DVDs - 28 million units with a total value £335 million.

2009

Total Internet sales of CDs - 34 million units with a total value £280 million (increase on 2005 of 40%)

Total Internet sales of DVDs - 70 million units with a total value £700 million (increase on 2005 of 209%)

TOTAL MUSIC MARKET VALUES (BOTH INTERNET AND TRADITIONAL SHOPS)

2005

Total CD Sales £1,856m

Total DVD Sales £2,214m

2009

Total CD sales £1,314m (decline of 29% on 2005)

Total DVD sales £2,111m (decline of 5% on 2005)

TOTAL NUMBER OF RETAIL OUTLETS ON UK MAINLAND

2005

Music Retailers 5,621

DVD Retailers 6,040

2009

Music Retailers 4,644 (19% decline on 2005)

DVD Retailers 5,181 (14% decline on 2005)

TOTAL NUMBER OF INDEPENDENT RETAIL OUTLETS ON UK MAINLAND

2005

Music Retailers 734

DVD Retailers 251

2009

Music Retailers 269 (63% decline on 2005)

DVD Retailers 175 (30% decline on 2005)

That’s a tale of tax abuse inspired decline in an industry facing unfair competition that the government has a duty to stop.

That abuse has to end now.

And it’s a government obligation to do so.