Low Value Consignment Relief will no longer apply to goods sent to the UK from the Channel Islands, the Government has announced.
The controversial tax loophole is used by many of the biggest UK online retailers – most famously Play.com, The Hut Group, Asda and Amazon – to dodge millions of pounds in tax.
LVCR allows low value goods (under 15) to be sent from the Channels Islands to the UK tax free.
This hasn't had a huge impact upon the games market as most boxed video games retail above 15. However, it has been a huge issue for CD and DVD retailers, and has had a significant impact on wider entertainment specialists, including HMV (although HMV's website is run out of Guernsey).
The new reform – which will come into effect from April 1st, 2012 – will mean that Channel Island retailers will have to charge UK consumers VAT on all items sold over the internet and mail order.
”These reforms will ensure that UK companies, especially small and medium sized enterprises, can compete on a level playing field with those larger companies with the resources to set up operations in the Channel Islands," said Exchequer Secretary of Treasury David Gauke.
"We are also protecting a significant amount of tax revenue. 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."
Legislation to enact the chance will be published on December 6th for inclusion in the 2012 Finance Bill.
JOBS AT RISK
Several organisations have lobbied the Government for years to get the loophole closed.
But some high profile politicians, including chief minister of Guernsey Lyndon Trott has expressed concerns over the proposal. He says it will have a 'significant impact' upon the Channel Island' and will put jobs at risk. Around 1,500 people are employed in the distribution industry in the territory.
However, Retailers Against VAT Avoidance (RAVAS) said the news should be welcomed, before citing some high profile closures, including Fopp, Zavvi (the High Street chain) and MVC. Not to mention hundreds of independent retailers.
The pressure group claims over 90 per cent of online music retail is now based in offshore companies – primarily in The Channel Islands.
RAVAS spokesperson Richard Allen has been campaigning against the loophole for six years: The removal of this major market distortion should be welcomed by all UK businesses that wish to trade online," he said in a statement.
"The VAT Loophole is not only contra to the basic principles of EU VAT law but is also contra to any sense of fair play and a ‘moral market'. Although we welcome competition based on price and service, a scheme that abuses tax legislation in order to promote damaging and predatory competitive behaviour should never have been allowed to develop.
"We hope that the UK Government and EU will now remain vigilant and ready to close down any similar schemes should they develop in other locations. The Channel Island's VAT loophole has over many years destroyed livelihoods and caused much misery in the UK business community.
He added: "We are of course sympathetic to those Channel Island employees who may lose their jobs as a result of the ending of this industry but we think it is entirely disingenuous for commentators to blame the loss of that employment on those attempting to correct what is clearly an unacceptable, unsustainable and damaging abuse of the tax system”
Along with CDs, movies and games, cosmetics, small gifts, electronics, memory cards and more have been sold from the Channel Islands to the UK VAT free.
Chancellor George Osborne announced in his 2011 Budget that the Low Value Consignment Relief would be looked at, reducing the tax threshold from 18 down to 15.