U.K. Chancellor to Consider Closing Tax Loophole

Sources

The Guardian: Budget 2011: Chancellor Moves to Close Online VAT Loophole

The Guardian: The Hidden Cost of Online Shopping
FT: UK to Close Channel Islands VAT Loophole

The Independent: Budget to Close Jersey's Hidden Mail-Order VAT Loophole

In the U.K., a tax loophole that consumers and corporations have been taking advantage of for the past ten years may soon be closed. Currently, items that cost less than £18 qualify for a value-added tax (VAT) waiver if they are imported from outside of the European Union. This tax rule is called Low Value Consignment Relief (LVCR), and was written nearly thirty years ago. However, retailers have only been taking advantage of it over the past ten years with the arrival of the Internet and prevalence of online shopping. Retailers take advantage of this loophole by building storage warehouses on the Channel Islands. Then, when consumers order these items online, they are shipped from the Channel Islands, where VAT doesn't apply due to this loophole. The types of goods that retailers typically dispatch from the islands include CDs, DVDs, camera memory cards, contact lenses, and vitamins. Several prominent retailers, including Tesco, Amazon, HMV, and Sainsbury's all use warehouses in either the islands of Guernsey or Jersey, both of which are part of the Channel Islands. With the VAT increase (to 20%) that took place in January 2011, taking advantage of this loophole has become even more attractive for these retailers.

Many are now taking notice of this loophole and criticizing it, given the U.K.'s struggling economy. According to official estimates, the loophole cost the Treasury £130 million in lost VAT last year. With the VAT increase this year, these losses could be much greater if the government doesn't step in. Further, the loophole has contributed to the closing of hundreds of High Street businesses and small record shops because they were unable to compete with the online bargains their competitors can provide by avoiding the VAT. For example, the number of independent music and DVD stores in the U.K. has dropped from 985 to 446 between 2005 and 2009.

George Osborne, the Chancellor of the Exchequer of the U.K., has proposed to reduce the £18 threshold for LVCR eligibility to £15 by November, in time to collect VAT from Christmas sales. Osborne has also pledged that the government will consider additional options throughout Europe to prevent the exploitation of the tax loophole and limit its scope. He went on to say that if nothing changes as a result, he would reconsider the LVCR in 2012, suggesting that he intends to close this loophole one way or the other.