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Tax avoidance plans fail to address Channel Islands VAT loophole

Published:  03 January, 2011

UK: Government plans to clamp down on tax avoidance have missed out a Channel Islands VAT loophole costing the Treasury hundreds of millions of pounds a year and devastating independent traders, the Forum of Private Business has warned.

Many large retailers have set up shop in Guernsey and Jersey and benefit from Low Value Consignment Relief (LVCR), which allows goods worth up to £18 to be imported into the UK VAT-free.

While some consumers buying items such as online DVDs have seen prices fall, many small shops and UK mainland based internet retailers are unable to compete or move offshore themselves and are being forced to close.

Following its pledge to address tax avoidance in the June Budget, and October's Comprehensive Spending Review, the Government has announced legislative changes aimed at clawing back some of the £7bn of tax revenue that is lost annually.

Immediate measures include preventing groups of companies using intra-group loans or derivatives to reduce their tax bill and reviewing schemes in which companies do not fully recognise loan and derivative monies in their accounts.

In addition, ministers have commissioned a feasibility study into a potential 'Government General Anti Avoidance Rule'.

Further details are to be announced on plans to address the practice of 'disguised remuneration', prevent investment companies retrospectively changing the currency they prepare their accounts in for tax purposes and tackle businesses which artificially split the supply of services to reduce VAT.

However, the plans do not include addressing LVCR through the Channel Islands which, while a legitimate tax relief, must not be exploited if it leads to unfair competition or VAT abuse.

This inaction is despite repeated calls from independent retailers and the Forum. In 2005 the business support organisation gave evidence to the All-Party Parliamentary Small Shops Group on the impact of LVCR abuse.

This group's 2006 report 'High Street Britain 2015' – which stated that, based on the then rate of closures, the UK's privately-owned shops would disappear completely by 2015 – recommended that:

  • The UK Government should immediately apply the lowest threshold applicable for the relief of low value consignments permissible in the directive, which is currently 10 euros, (approximately £7). This would eliminate the vast majority of exploiting trade almost immediately.
  • The enforcement by government bodies like Customs & Excise of VAT should be reviewed to ensure a level playing field.'

In the 2006 Budget, the previous government said it was aware the loophole, originally an administrative relief, was "being exploited" and that it would consider changes to prevent this.

However, since then even more retailers have set up in the Channel Islands and no action has been taken to protect small, independent shops and internet retailers.

Research carried out by the Forum in 2010 found that 68% of small employers believe the tax system is 'unfair', with 52% believing that larger firms have the resources to invest in tax loopholes where they cannot afford to do so themselves.

"The Channel Islands VAT loophole distorts competition and leads to VAT abuse. It was not created to allow large retailers to undercut their smaller, mainland competitors, which is what is happening now on a worrying scale, forcing many to close," said the Forum's head of campaigns, Jane Bennett.

She added: "If the Government is serious about achieving rapid small business growth this should happen as part of a major re-think of the operation of the UK's tax system, which is currently one of the most complex in the world."

This month, the Forum will submit evidence on the Channel Islands VAT loophole to the Treasury Select Committee as part of its inquiry into the fundamental principles of tax policy.

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