Out-Law News 2 min. read

Channel Islands VAT loophole to close from April

A tax loophole which allows retailers to avoid VAT charges by bringing low-value goods into the UK via the Channel Islands is to end from 1 April 2012, the Government has announced.

David Gauke, executive secretary to the Treasury, said that ending low value consignment relief (LVCR) on imports from Guernsey and Jersey would allow small UK companies to compete on a "level playing field" with larger firms who had the resources to establish a presence in the Channel Islands.

However Mike Hunter, a tax law specialist with Pinsent Masons, the law firm behind Out-Law.com warned that rather than "killing off" the current practice, retailers could move their operations to other non-EU jurisdictions such as Switzerland.

Retailers considering this would need to weigh up whether the prospective VAT savings would outweigh increased transport costs, he said.

LVCR can be applied to goods imported into an EU country from outside the EU. It allows member states to exempt shipments of low value from VAT in order to avoid the administrative costs associated with collecting small amounts of tax and to speed up the transit of goods which might otherwise be delayed by customs.

The Government announced it was exploring options to "limit the scope" of LCVR in the 2011 Budget (104-page / 1.1MB PDF) in order to prevent the relief being "exploited for a purpose it was not intended for".

In recent years LVCR has been used on an "increasingly large scale" to sell low-value goods to UK customers VAT-free, the Government said. Most of this trade comes from, or via, the Channel Islands, it said.

The cost of LVCR to the Exchequer has increased dramatically in recent years and is now around £140 million annually, according to Government figures.

The Channel Islands, made up of the Bailiwicks of Guernsey and Jersey, are self-governing Crown dependencies which are historically linked to the UK. Under the islands' Treaty of Accession with the UK, the Channel Islands are not part of the EU but are part of its customs territory. This means goods imported via the territories can take advantage of LVCR where applicable but there are no restrictions on the free movement of those goods.

In 2008, the then Financial Secretary to the Treasury Jane Kennedy stated in a written answer that "around three quarters" of the VAT avoided through LVCR can be attributed to imports from the Crown dependencies.

The Government reduced the threshold below which items can be imported to the UK free of VAT to £15 from £18 from 1 November 2011. This new threshold will apply to goods imported from the Channel Islands until 1 April next year.

LVCR will continue to apply at the new £15 threshold to commercial supplies from other non-EU jurisdictions with no current plans to reduce that threshold further, the Government said.

It added that the change would not effect the existing import reliefs for gifts and other non-commercial consignments from the Channel Islands and elsewhere outside the EU.

"By making these changes, we are striking the best possible balance between the costs of collecting small amounts of VAT and protecting the interests of UK taxpayers and businesses. We are also protecting a significant amount of tax revenue," Gauke said.

Legislation to enact the change will be included in the Finance Bill 2012, the Government said.

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