Channel Islands VAT rules

Why are we talking about this now?

As Chancellor George Osborne prepares to present his Budget on March 23, expectation is growing that he will close a loophole allowing retailers to sell products into the UK mainland from the Channel Islands, taking advantage of low-value consignment relief (LVCR).

What is LVCR?

It means retailers can sell goods from the islands to the mainland, without paying VAT on products costing less than £18. Retailers of entertainment products, such as DVDs, are best known for doing this.

Why is there a problem?

Any way of raising income is on the Government agenda, but for many retailers that take advantage of the rules a clampdown would be an unwelcome intervention potentially undermining performance.

What retailers will be affected?

Big names such as Amazon, Asda, HMV, Play.com, Sainsbury’s and Tesco are among the best known.

Although the issue has made headlines in the entertainment market, one retailer notes that the category is simply “the tip of the iceberg”. Goods as wide-ranging as fishing tackle and computer accessories are all covered by the regime.

But retail opinion is divided on the merits of LVCR. Many big groups can drive volumes and margin on many categories, but smaller retailers hate the system.

That’s because they are unable to afford the running costs, or deliver the volumes, that make a Channel Islands base advantageous. They are infuriated that sales from their comparatively small store bases are being undermined by those able to run operations from the Channel Islands and they view the system as contradictory because it allows a UK retailer to sell to UK consumers on an artificial basis.

Observers also think that the arrangements are not necessarily favourable even to some of those that use it. They point to HMV, maintaining that sales through its shops are being eroded by its own Channel Islands operation.

Will the forthcoming Budget bring change?

It is unclear. Last week, commercial secretary to the Treasury Lord Sassoon said: “We are committed to tackling tax avoidance and, in that context, we hope to be in a position to announce possible changes to the operation of LVCR in the Budget.”

But one director of an independent entertainment retailer was dismissive of the likelihood of change. He said he doubted the loophole would be shut. “It’s under review, as before,” he said.