Value Added Tax-free Exports from the Channel Islands

Value Added Tax-free Exports from the Channel Islands are exports of goods from the Channel Islands on which value added tax (VAT) is not levied. In recent years, companies in the United Kingdom have expressed concern at the competition thereby offered to their goods on which VAT is levied.

Background

The Channel Islands consist of the two Crown dependencies of Guernsey and Jersey, which are self-governing, but historically linked to the Crown. As such they are not part of the European Union and do not charge VAT on purchases (although a 3% goods and services tax was introduced in Jersey on May 6th 2008).

When goods are imported into the United Kingdom from a non-EU territory, an excise duty is charged at the same rate as VAT (currently 17.5% for most goods). However due to an EU regulation designed to reduce the cost of tax collection on small consignments, an exception is made on shipments where the total value is less than £18.ref|HMRCnotice143 This is an administrative relief known as Low Value Consignment Relief or LVCR. It can be set between 10 and 22 Euros by individual member states of the EU. The UK set the limit at its maximum level.

Items such as DVDs and CDs commonly cost less than this £18 threshold, and therefore if sold from one of the Channel Islands, no VAT or Excise Duty needs to be paid. As it has become easier to sell by mail order with the growth of the Internet, the practice of selling CDs and DVDs through the Channel Islands has become more common.

Often the reduced tax liability outweighs the increased postage costs, meaning that the Jersey-based retailer can undercut competing retailers based in the UK. Because of the regular cross-Channel ferry links it is easy to export UK goods to the Islands and in recent years the Jersey Post Office, through its sister company Jersey Post Logistics, has set itself up as an Internet fulfillment operation taking full advantage of the LVCR service so that goods can be sent from the UK to Jersey and back again by mail within 48 hours.

A similar situation does not exist between the Isle of Man, another Crown dependency, and the UK. The Isle of Man is in customs union with the UK, and VAT is levied within the Island.

Controversy and legal arguments

The Channel Islands have no say over the operation of Low Value Consignment Relief as they are not members of the EU and the relief is granted to the importer of the goods and not the exporter. The Channel Islands have no influence on the tax policies of the UK government.

The bulk of mail order goods sold through the Channel Islands are UK products exported to the Islands and then mailed back into the UK VAT free. Certain UK companies have described this position as a loophole and have described the trade as tax avoidance, claiming that they are losing turnover on low value items through losing customers to companies selling direct from the Channel Islands.

Some legal commentators have pointed out that this practice runs contra to the intent of the EU legislation covering Low Value Consignment Relief. In January 2007 a group of UK retailers threatened to take the UK Treasury to Judicial Review if it failed to implement EU regulations surrounding Low Value Consignment Relief to their satisfaction. The retailers pointed out that the EU directives disallowed relief on any goods that distorted competition in the home markets or created a vehicle for tax avoidance. This legal argument is yet to be resolved and the UK Treasury have yet to clearly announce their position so the threat of Judicial Review remains.

Government reaction

The Government of the United Kingdom mentioned the issue in the 2006 Budget wherein they stated that they were aware of the abuse of the Low Value Consignment Relief by companies who had set up in the Channel Islands and that they would introduce legislation to stop the avoidance of VAT if companies continued this behavior. The 2006 budget also stated that £85 million per year was currently being lost in unpaid VAT as a result of this trade. This amount is expected to rise to £200m soon.ref|BBC14Jun05

The States of Jersey in March 2006 announced a new policy to govern the fulfillment industry in the Island and stated that companies who export to the UK by mail order must first obtain a licence. They argued that this was to ensure that the Island was not taken advantage of and that tangible economic benefits would remain in the Island. More recently, owing to the bad press generated by the expansion of the fulfillment industry in the Channel Islands, the government of Jersey has announced that it has asked certain UK retailers to cease their operations there although wholly owned Jersey companies will still be allowed to continue trading. One of the companies asked to leave is Tesco and despite keeping their offices in Jersey they have moved their fulfillment operations to Switzerland. This has provoked some Jersey Government ministers to point out that the new policy is not actually stopping the trade or helping the Island's economy. Despite these changes the bulk of customers for CDs and DVDs remain in the UK and the VAT avoidance mail order industry continues to flourish in the Channel Islands.

Retailers operating from the Channel Islands

The following is an incomplete list of retailers that sell to the UK from the Channel Islands to profit from the tax regime.

Jersey

*Play.com– Play.com is a Jersey company which also operates offices in Cambridge in the UK.
*Amazon Jersey – visitors to amazon.co.uk will be given the option to buy from the sister site
*Tesco Jersey – visitors to Tesco.com will be given the option to buy from the sister site although in early 2007 Tesco re-located fulfillment to Switzerland having been asked to leave Jersey as part of the Island's attempt to clean up the trade.
*Sendit.com – Orders under £18 are fulfilled by a sister company "Sendit (Jersey) Limited"
*BlahDVD.com– Operates entirely from its headquarters in Jersey, and has been trading since April 2003.

Guernsey

*Filmnight.com
*TheHut.com
*HMV.co.uk
*HealthSpan.co.uk

References

# cite web
url=http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?id=HMCE_CL_000014&propertyType=document#P58_4584
title= Are import duties and import VAT always payable?
work=Notice 143: A Guide for international postal users
publisher=Her Majesty's Revenue and Customs
date=August 2005
accessdate=2005-12-29
# cite news
url = http://news.bbc.co.uk/1/hi/business/4076524.stm
title = Call to end CD sales loophole
publisher = BBC News
date = 2005-06-14
# cite news
url = http://news.bbc.co.uk/1/hi/world/europe/jersey/4707463.stm
title = New moves to close VAT loophole
publisher = BBC News
date = 2005-07-22