Pureplay and multichannel retailers will be watching with interest to see how a Budget pledge this week to crack down on the use of a Channel Islands tax loophole to avoid paying VAT on low-value goods plays out.
Chancellor George Osborne used Wednesday's Budget to announce a clampdown on a VAT loophole that makes it more attractive for ecommerce retailers to ship low-value goods from the Channel Islands. At the moment online retailers can use the Low Value Consignment Relief scheme to send goods worth £18 or less from the Channel Islands free of VAT, reducing the cost to the consumer. Their ability to do this has been blamed for the failure of independent music stores and larger chains including Zavvi.
On Wednesday Osborne announced that this threshold would be reduced to £15 from November. Options would also be explored for ending the use of the loophole altogether.
Announcing the measure to the House of Commons he said: “We're going to tackle the exploitation of low value consignment relief that has left our high street music stores fighting a losing battle with warehouses in the Channel Islands.”
The Government will go on to “explore options with the European Commission to limit the scope of the relief so it can no longer be exploited for a purpose it was not intended for.”
If that came to nothing, the issue would be revisited in next year’s budget.
A cautious welcome for the move has come from lobby group RAVAS (Retailers Against VAT Avoidance Schemes). Spokesman Richard Allen said the move to reduce the threshold to £15 wasn't "going to have much immediate relief for those retailers suffering the daily reality of a distorted internet retail market," warning: "many UK retailers might not survive another year of this."
But he added: "However, they certainly won’t be opening bottles of champagne in the offshore fulfilment industry either as it appears the days of this arrangement are numbered. We maintain a strong dialogue with the European Commission on this issue and we will be monitoring developments closely."
Ruel Taylor, operations director at online retailer Mobile Fun said it did not anticipate problems as a result of the loophole’s closure. He said: "We are a company that sources globally and exports to 21 countries from our central warehouse in the UK. This means we have always paid the correct VAT amount on exports and although, following January’s VAT rise, the UK lost its competitive edge over the EU, our dedicated European websites are charging local VAT rates so we haven’t experienced a decline in exports to France and Germany."