Jersey Attempts To Close VAT Loophole

by Jason Gorringe, Tax-News.com, London

02 March 2006

The Jersey government has pledged to introduce measures that will make it harder for large retail groups based in the United Kingdom to exploit a 'loophole' in value added tax laws to sell goods VAT-free in the EU, although small business representatives have warned that the crackdown lacks teeth.

The "low-value consignment relief" provision allows retailers to sell goods such as CDs, DVDs, computer games and contact lenses that are valued at under GBP18 VAT-free from Jersey and Guernsey back to the UK through websites. The Channel Islands are not part of the EU for VAT purposes and, therefore, goods under this value sent by mail order from the Islands are exempted from VAT.

According to a report in the Financial Times, a new licensing system for UK companies operating through Jersey-based distributors will mean that these firms must withdraw from Jersey within a year.

The FT quoted Philip Ozouf, Jersey's Minister for Economic Development, as suggesting that the policy would "catch most of the activity," although retailers possessing licences without time limits would be allowed to remain.

The crackdown will not affect Jersey-based CD exporters with local management and sales operations, the FT reported.

The measures have been welcomed by the small business lobby, which has been campaigning for an end to the practice, warning that, unable to compete, independent retailers face bankruptcy.

However, the Forum for Private Business, which lobbies on behalf of small and medium-sized enterprises (SMEs) has said that the measures lack clarity, and the FPB has urged the Jersey government to explain its policy more clearly.

"If Jersey is serious about this crackdown, and it has made similar claims before, it has to state when the retail giants will have to leave,' the FPB's Chief Executive Nick Goulding stated.

Mr Goulding noted that businesses based in Jersey, such as Play.com, will still be able to exploit the alleged loophole. He also pointed out that there has been no commitment from the Guernsey government to stop the practice.

Mr Goulding has also urged the UK Treasury to "act decisively" in the budget, due to be announced later this month, to halt the practice.

"Failure to do so will result in independent music shops, opticians and health food suppliers going bust," he warned.

A Treasury sub-committee meeting was told by government minister John Healy in February 2005 that the Treasury is losing GBP80 million a year in revenue as a result of the tax 'loophole' activity.

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