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
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Richard, Thanks for posting this. If anybody wants to argue any of these points here, I’ll take on anyone….
This letter needs to be sent the editor of the Jersey Evening Post, which repeats the story that LVCR was introduced (I quote) “to enable Jersey to get its fresh flowers to the UK market without having them delayed in Customs holding areas” (today’s issue, page 2)
Richard?
Will you send?
Sent…this is total rubbish as it would be entirely illegal for the UK to allow an EU administrative import relief to be used as a trading advantage for a non EU state. The Treaty Establishing The European Community Title VI, ‘Common rules on competition, taxation and approximation of laws’ Chapter 1 ‘Competition’ — Section 1 — ‘Rules applying to Undertakings’ (Article 81) prohibits “all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market”. Whilst this applies to traders there is no reason to believe it would not also apply, even more strongly, to Member States.
Richard
As someone who was guilty of (unknowingly) propogating the horticultural myth in a reply last week, I’d like to thank you for taking the time to explain LVCR so fully.
My pleasure
I’m not sure I’m happy about being accused of scamming the system but as I said on another blog I’m against circular shipping and misuse of any tax relief including LVCR.
What is there to stop people relocating to other third countries and posting the goods from there, the US for instance who i believe provide this service.
Well you could give it a respectable name like “offshore fulfilment ” if you want, like everyone else does. LVCR legislation obligates member states to prevent evasion avoidance and abuse (“offshore fulfilment”) occurring through LVCR, so if it’s happening in other locations and goods are being deliberately round tripped via the USA (and I know a number of retailers doing this on Amazon) then the member state has to use the measures open to to it to prevent this. Whilst it won’t be stamped out completely I would hope that major companies advertising VAT avoiding goods in the British media would be a thing of the past. If you are going to ask about the practicalities of enforcing EU law, well that’s a whole different debate. Put it this way, the fact the EU didn’t notice this was going on for 15 years doesn’t exactly say much for their ability to police EU legislation either, but that doesn’t make breaching it acceptable.
Some gaping omissions of facts, in this article.
Play.com and others, have had a good run on the sale of VAT-free physical media, such as CDs, and DVDs. The apparent demise of Play.com’s off-shore operations will be in part, and probably largely due to the fact that CDs are no longer sold in anything like the volumes they once were. That is because of two main reasons, MP3 sales, and free music – most music is available for free in one form, or another, and legally, e.g. on YouTube and paid for by advertising.
I can listen to almost any music track, near enough instantaneously, anywhere there is a mobile data service, using my smartphone. So, why would I buy a CD?
For musicians, the money is now to be made by selling tickets to gigs, and other spin-offs, e.g. licensing their songs to others, such as X-Factor, movie, and video game sound tracks, and TV ads.
LVCR has not ended just yet, the value is to be reduced, and reduced to a level which is still higher than typical retail prices of CDs, and movies.
Feelunique.com has just recently purchased a Channel Island based perfume retailer, Au Caprice. Why is that? Presumably, they think there is still money to be made from LVCR for sometime yet.
This thread is about the operation of LVCR and the legality of abusing LVCR under EU law. Your points about the long term viability of particular product sectors are completely irrelevant. The LVCR threshold has been reduced to £15 in order that the UK is seen to do something immediately to correct its ongoing breach of the LVCR directive. Even the UK Treasury have admitted that measure will have no effect. Further measures are going to be announced shortly as was recently confirmed by Treasury Secretary David Gauke. Those measures have to fulfil the UKs obligation to prevent avoidance evasion and abuse. Just because someone in the Channel Islands thinks there is still money to be made does not change the fact that this breach of EU law will have to be corrected by the UK. If you disagree please make a legal argument to justify your position and then I’ll be happy to respond.
Feelunique.com has just recently purchased a Channel Island based perfume retailer, Au Caprice. Why is that? Presumably, they think there is still money to be made from LVCR for sometime yet.
More likely that Au Caprice are on the skids and the goodwill is worth having.
Most perfume is above £18, so outside scope of LCVR.
In Guernsey most people don’t really care about the offshore fulfilment industry. It does little for our economy and most employees are poorly paid migrants. Obviously a few individuals have made money, and most have just indicated they willl relocate somewhere else.
I can add to that. Perfume is specifically excluded from LVCR
Article 23
Exemption shall not apply to the following:
(a) alcoholic products;
(b) perfumes and toilet waters;
(c) tobacco or tobacco products.
So nobody should be selling any perfume VAT free as its illegal.
Glad to hear that the loss of this industry won’t be an issue for the Guernsey which has frankly been exploited by Tax cheats.
Richard,
Please can you look at doing a piece on the elections in Jersey before October 19th. Is there any hope for change? Which candidates offer some prospect of ethical progress?
I regret I don;t know enough candidates to do that
I would vote for Geoff Southern and Ted Vibert and Daniel Wimberley
Stuart Syvret? I doubt it
Beyond that….I’m left guessing