UK To Address Import VAT Break

by Robert Lee, Tax-News.com, London

04 March 2011

The UK government is reviewing a tax relief that allows imports which fall below a certain value to obtain exemption from value-added tax (VAT), a March 1 House of Lords debate revealed.

The Low Value Consignment Relief (LVCR) measure, which has come under attack in recent months from pressure groups and retailers on the British mainland, was announced to be under review, with any proposed changes to its operation to be introduced in the March 23 Budget. Under the LVCR system, in order to avoid disproportionate costs to consumers and businesses, low value goods imported from outside the EU are exempt from VAT charges. In the UK, VAT is not collected on imported goods which fall under the value threshold of GBP18. For such purposes, the Channel Islands are treated as being outside of the EU.

The existing rules, introduced 28 years ago, were brought in in order to aid Channel Island flower growers, providing them easier access to the UK market. However, with the advent of the internet, the recent boom in CD and DVD sales online, and the establishment of warehouses in the Islands by companies such as play.com, Amazon and Tesco, the rules have increasingly benefited companies such as these with a base in the Islands. According to Lord Newby, the rule now affects more than 90% of CD sales in the UK. In turn, the rule has come under heavy scrutiny, prompted, among other things, by the collapse of mainland-based retailers such as Woolworths and Zaavi.

When questioned during a Lords debate, Commercial Secretary to the Treasury Lord Sassoon told peers that the latest HMRC estimates put the cost in lost VAT revenue at a figure of GBP130m for the 2010 calendar year, and at GBP140m for the fiscal year 2009-10. When challenged by Lord Lucas that "what started out as a quite reasonable relief for Channel Islands flower growers has now been abused to the point where it has destroyed whole industries in the UK", Sassoon replied that the government was committed to tackling tax avoidance and was "actively reviewing the operation of the relief". According to estimates, quoted by Sassoon, the VAT loss is estimated to have increased by approximately 50% over the last five years. Sassoon pledged that "if there are things that we believe should be done, they will be announced in the forthcoming Budget".

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