ANALYSIS: Channel Island tax dodge

When Play.com took advantage of the Channel Island tax relief back in 1998, it changed UK online retailing overnight.

Low-Value Consignment Relief (LVCR) meant that any goods sold from the Channel Islands under 18 didn’t have to pay VAT. That included DVDs, CDs and budget games. And with Play.com based in Jersey, the firm had a huge advantage over its rivals.

Over the following ten years, Asda, Amazon, HMV and The Hut all started operating out of the region. And this proved catastrophic for the High Street.

It’s unfair to blame LVCR solely for the deaths of Zavvi (the High Street chain), MVC, Silver Screen and Fopp, but the fact that Play and its like had a 17.5 per cent (now 20 per cent) price advantage over the High Street certainly had an impact.

Following over a decade of inactivity, finally the Government has acted. Earlier this year it lowered the tax threshold from 18 to 15 and last week announced that as of April 1st, 2012, the tax loophole would be closed entirely. It’s something UK retailers on the whole have embraced.

The interests of our customers, in an increasingly multi-channel world, are best served by retailers operating on a level playing field,” said a HMV spokesperson. No organisation should be able to gain a significant commercial advantage over its competitors by relocating fulfilment or digital operations to a non-EU territory.”

WHAT’S LEFT TO SAVE?

CD and DVD High Street retail has declined significantly over the last ten years. For music, only HMV, the supermarkets and a handful of indies remain. And should HMV suffer another poor Christmas, it might not be around to see the new law put in place. Has it all come too late?

In the case of CDs and DVDs I’d agree but we’ll have to see how things pan out,” admits Richard Allen, spokesperson for Retailers Against VAT Avoidance Schemes, a group he set up after his own online shop closed.But RAVAS does not just represent CD and DVD retailers. For other sectors – particularly horticulture – this is a major victory.”

The Government’s new decision also puts jobs at risk. Over the past 13 years a huge fulfilment industry has been built in the Channel Islands and over 1,500 people are employed in the sector across Guernsey and Jersey.

No one can blame those retailers who have invested in business operations in the Channel Islands. The law allowed them to do so,” said ERA director general Kim Bayley, who has the difficult task of representing both the retailers in the Channel Islands and those campaigning to get the loophole closed.

The problem now is that having lured many companies to the Channel Islands with this tax break, suddenly withdrawing it like this is bound to have consequences for both the operations of many businesses as well as for Channel Island jobs.”

The biggest criticism of the Government’s latest move is that it only covers The Channel Islands. There are successful online retailers enjoy tax relief from other territories – Switzerland (DVD.co.uk is based there), Hong Kong (CD Wow) and the US.

Bayley adds: We believe the real solution would be for all cultural goods to be zero-rated for VAT like books. Failing that, the Government must address the issue in Brussels. In a globalised world it does not make sense to address an anomaly in the Channel Islands alone. Much of this business will simply be displaced elsewhere.”

MCV understands that some of the current Channel Island retailers are now eyeing moves to other territories. But Allen doesn’t believe this will work.

Other territories are nowhere near as advantageous and there are complications – it took years for Play.com and so on to get chart registered status and major label support,” he tells MCV.We know that HMRC, and the EU, are in no mood to tolerate this behaviour.”

FAILING CUSTOMERS

Yet surely the biggest losers in all of this is the customer, who now faces rising prices for DVDs, music and games.

Yet Gian Luzio – an online retail expert who has worked in senior roles at Play.com and The Hut Group, and has just taken his new online project, Bee.com, to the Channel Islands – argues that all this tax avoidance does not benefit customers.

He says: As non-traditional retailers entered the market – discounting entertainment products to gain market share – the difference in price has become negligible. Consumers who buy online have also changed and now demand much faster delivery than is possible from the Channel Islands.

"I believe that all retailers should compete on a level playing field. However, the more tenacious retailers have already examined alternative fulfilment centres in Asia, Switzerland and the US that will avoid VAT. But they will always offer a more sub-standard customer experience.”

Another offshore-based UK online retailer agreed with Luzio, adding that shipping product from the UK only to ship it back again was a monumental waste of energy and damaging to the environment.”

BETTER LATE THAN NEVER?

There is little doubt that if the Government had acted on the VAT loophole five years ago, retail’s response would be more emphatic.But today traditional entertainment retailers – what’s left of them – are more concerned with downloads, streaming and the decline in popularity of packaged goods.

And the fact the Treasury’s plans only covers the Channel Islands means the biggest online behemoths can go elsewhere. For the dying remains of entertainment on the High Street, the VAT loophole closure doesn’t go far enough.