Channel Islands VAT loophole to end on 1st April 2012

The tax loophole enabling companies to retail goods and shipping from the Channel Islands to avoid charging VAT is to end as of the 1st April 2012.

The VAT Low Value Consignment Relief (LVCR) will increase the cost of goods from the Channel Islands by 20% putting them on a par with goods purchased anywhere else for UK residents.

Since the 1990s many companies have set up operations in Jersey and Guernsey for the sole purpose of avoiding VAT when selling low value easily postable goods such as CDs and DVDs that sold for less than £18.00. This had already been reduced in the last budget to £15.00 but now the advantage is due to be scrapped entirely from April next year.

Of course the question now is is it a good thing or is it too little too late? Many retailers have complained for years that they’re unable to compete with retailers based in the Channel Islands. DVDs and CDs are hardly a growing market, much of this media is now downloaded and although HMV may find it easier to trade but the real question is how many small businesses have already gone bust as they were unable to compete. Ending of the tax relief certainly won’t help the Channel Island’s economy either.

It’s not just media though, many low cost consumer electronic items are also sold from the Channel Islands. Are these companies likely to relocate to the UK mainland or continue to operate from the Channel Islands? Not likely – the chances are that at the first opportunity they’ll cut their off shore losses and move to the next country that offers them a tax avoidance advantage.

Watch out for companies setting up in the far East, the Isle of Man or selling from anywhere that low cost goods can be posted without the VAT being collected.