LVCR was originally introduced in 1983 when EU member states had customs borders to ease the transit of low-value samples, such as artwork and manufacturing parts, between jurisdictions by exempting them from VAT. When the customs borders came down in 1992, LVCR had little use except for goods entering the EU. But with the advent of the internet and the mass expansion of mail order, the close proximity of the extra-EU Channel Islands provided the perfect loophole for large retailers selling to UK customers to avoid paying VAT.
Under pressure from the EU and domestic taxpayers struggling to compete with their offshore rivals, the UK removed LVCR on mail orders in last month’s budget. But that may not be the end of the story.
A new structure
A well-known Guernsey internet retailer has said that they were looking at shipping goods into Germany and claiming LVCR there on goods that were addressed to customers in the UK.
“I understand from the same Guernsey retailer there is a memorandum of understanding (MOU) between Germany and the Channel Islands which means Germany allows the islands to collect tax for them in return for expediting the goods through customs,” said Richard Allen, a spokesperson for Retailers Against VAT Avoidance Schemes who spent 20 years in the music industry. “This is of course intended for goods being sent to German customers from the Channel Islands.”
The Channel Islands also have an MOU with the UK to collect VAT. Allen points out that if they are knowingly shipping through Germany to the UK, then they would be in breach of this agreement which is intended to collect VAT on all items sent to the UK.
“Shipping items via Germany destined for the UK is avoiding VAT and creating a false postal audit trail,” said Allen.
Allen explains that Universal Postal Union rules make it clear that the item has to be formed and stamped in the country of origin to claim LVCR. He argues that adding printed postal stamps in the EU while also claiming LVCR is open to abuse.
“In theory, Channel Island retailers could send bulk mail to Germany under distance selling arrangements and stamp it in Germany,” said Allen. “Even though the packages are not addressed to German customers, they could claim LVCR.”
Mark Agnew, senior VAT consultant at Baker & McKenzie, believes that following the UK’s decision on LVCR, it is to be expected that Channel Island retailers will be looking for new ways to structure. He understands this is being considered by the industry, though he does not promote such a strategy.
“It could well be that they will look to make import clearance through another EU country,” said Agnew. “Belgium also has a good import clearance mechanism for this and I’ve heard people talking about routing through there.”
Despite this, Agnew says routing deliveries from the Channel Islands to Germany or Belgium and then back to the UK will cause logistical headaches for businesses.
“I know one business in Jersey that has a selling point of shipping within 24 hours, and this structure would add a couple of days to shipping time, so they’ve said they won’t be considering it,” said Agnew.
Legality
Agnew expects that the UK Treasury will attempt to close new loopholes that the Channel Islands and retailers based there might be looking to exploit. However, one postal expert who advises companies on how to legally reduce their tax believes such structures may be straying into criminal fraud.
The expert, who wishes to remain anonymous, alleges that Jersey Post is privy to the scheme and has had discussions with its customers about how to take advantage of it.
“Jersey Post knows LVCR is no longer applicable and by shipping it this way, it is not just guilty of avoidance, but criminal tax evasion,” the expert said. “My advice to clients is to not touch this dodge, it’s clearly illegal.”
Allen notes that a customs expert told him that if goods were cleared in Germany first and LVCR granted then that would be highly illegal as it’s not the place of final importation and goods are not addressed to German individuals. For that reason he thinks that the Channel Islands may not want to actually clear items in Germany so they may be using a bonded warehouse in Germany to ship packages into the UK to try and claim that the UK is the final place of importation.
“That doesn’t work though because a bonded warehouse is effectively nowhere and the package will have come from Jersey to the UK via a stop in nowhere,” said Allen, pointing out the UK LVCR ruling would still apply.
“I’m amazed Jersey would sanction this,” the postal expert said.
Jersey Post denies any such involvement.
“Jersey Post does not normally comment on rumours but on this occasion is happy to confirm that it is not aware of any of its customers posting goods to the UK via Belgium or Germany to obtain the benefit of LVCR which, since April 1 2012, has been denied to businesses operating in the Channel Islands,” a spokesman for the mail service said.
Denying accusations of VAT abuse taking place, Jersey Post points to paragraph 62 of the written judgement of Justice Mitting dated March 15 2012 in relation to the Judicial Review of the UKs amended LVCR legislation, which they say absolves Channel Islands traders of any accusations of abuse.
“They [Channel Island traders] are doing nothing beyond accepting orders from customers and supplying them, in the ordinary course of their trade,” the judge said.
“If this was true then the judge would be right,” said Allen. “But Channel Island retailers take orders and split them down into lots of packages. I do not regard that as the ordinary course of trade. Why would you send items individually?”
Allen argues that the legitimate use of LVCR would be to take orders and send them out as a single order. However he says that if three CDs are sent out together with a value of £30 ($47), it would not attract LVCR. So they are sent out individually.
Competition
Allen is particularly concerned that VAT avoidance by the big retailers will continue because it is distorting competition in the market.
“I used to run a record label,” said Allen. “I supplied HMV (a UK-based music retailer), but they sold my CDs on their website VAT free and undercut my own website and my UK retail outlets.”
He argues that VAT is already collected within the EU on downloads to prevent this kind of disparity and the music industry fought hard to ensure that this was the case.
“It can’t be beyond the wit of man to devise a similar arrangement with mail order goods so that the point of taxation is the place where the customer resides,” said Allen. “You can’t allow a situation where VAT is only applicable within an EU member state depending upon where the item is sent from because all other retailers operating within the same state where that sale is made are then at a disadvantage.”
