When LVCR was first introduced, EU member states still had cumbersome customs borders and it made little sense to slap VAT on low-value samples, such as artwork and manufacturing parts, being sent between jurisdictions. When the customs borders came down in 1992, LVCR was quickly forgotten, 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 loophole has now been closed, but some large retailers are looking for ways around it.
A well-known Guernsey internet retailer has said that they were looking at shipping goods into Germany and claiming LVCR there on products that were addressed to customers in the UK.
Postal and customs experts warn, however, that this dodge is illegal and those knowingly party to it will not just be avoiding VAT, but committing criminal fraud.
Aside from the dubious legal nature of such new structures designed to get around the UK’s removal of LVCR on mail order items, it makes little business sense beyond avoiding the taxes onshore retailers pay.
While LVCR was still in place for Channel Island imports, Retailers Against VAT Avoidance Schemes, a group of UK companies campaigning to end LVCR abuse, uncovered significant evidence of order splitting. Even where 10 identical items were ordered, each was sent out individually so as to avoid the VAT that would have been paid had they been packaged together.
This is clearly an abuse of the good-faith nature of LVCR which was designed to help businesses operate across customs borders and not what the tax relief was designed for. To continue to claim VAT relief by routing packages via Germany or Belgium is clearly not operating within the spirit of the law, and probably not the letter either.
Moreover, some companies pride themselves on shipping products within 24 hours. Circular shipping from the UK to the Channel Islands to Germany and then back to the UK would add several days to delivery time. Such logistical headaches have already put some businesses off the idea of pursuing a scheme that has no real benefit beyond tax avoidance.
Onshore retailers are right to be concerned about the unfair advantage their offshore competitors have gained by exploiting loopholes that were never intended for them. To ensure that everyone is operating on a level playing field, campaigners argue that physical products, like downloads, must be taxed where the customer resides.
Loopholes are closing fast and it is only a matter of time before the UK government catches up with the new structures that are being employed to get around LVCR removal in the Channel Islands. Meanwhile, other EU member states are likely to be much less tolerant towards the Crown Dependencies which the UK is keen to protect. The big internet retailers would be wise to get out before it costs them too dearly, to move their operations onshore and to structure in ways which make sound long-term sense to their businesses and their customers before thinking about short-term tax advantages.