Sunday, December 30, 2012

VAT & LVCR

November 29, 2010
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment 


As UK consumers complete their wish-lists for home entertainment gifts this December, they might do so with an eye to the 20% increase in VAT due in the New Year. The industry hopes the imminent tax rise might loosen purse strings and bring it more than a little holiday cheer and the government relishes the increased revenue. But rather than bump up pre-Christmas spending to avoid the coming 2.5% rise, shoppers might just decide to pay no VAT at all.

There was a time when purchase taxes were unavoidable except at UK borders and a holiday wasn’t complete without stopping in at the duty-free store. Now, however, it’s not necessary to go anywhere, the islands will come to you. The Channel Islands, that is.

A piece of UK legislation known as Low Value Consignment Relief (LVCR), passed in 1983 and amended in 1991, provides for an optional exemption from VAT for low value products that originate in certain countries that are not part of the EU. It allows EU revenue collection departments to set a threshold value below which VAT is not collected. All but one member country opted for the upper limit of £18 (€22) for a single parcel, on the basis that the cost of collection on a multitude of individual small consignments would exceed the revenue obtained.

As with many exceptions to the rule, it probably seemed like a good idea at the time. The economy of the Channel Islands is almost inseparable from the UK’s, with little or no industrial mass-production of goods. To encourage exports to the mainland, LVCR rules work on the assumption that the potential loss of revenue on small parcel shipments from the Islands is insignificant.

Not so today. Jersey Post, the equivalent of the Royal Mail and until recently the monopoly carrier, shipped 60 million parcels and packets to the UK over the past year. The Entertainment Retailers Association (ERA) published figures for 2009 that showed the total amount of VAT lost on packaged media mail order sales is around £165 million, a sum that is likely to be much higher in 2010.

This figure is only for digital discs. Many other products fall into the LVCR category across a wide range of goods from computer memory sticks to beauty and healthcare products and beyond. Add shipments from other carriers in the Channel Islands and elsewhere, and the lost VAT receipts total several hundred million pounds a year, according to VAT campaigner Richard Allen.

In September, Allen wrote to Chancellor George Osborne to demand action on what he describes as “a significant tax avoidance scandal”. He claims that his online mail order business selling music CDs was “healthy and profitable” until five years ago, when HMV set up in Guernsey. In his view, the Channel Islands operators are not bona fide local companies and their sole purpose is to provide fulfilment services for mainland retailers.

This month’s announcement of an agreement between Jersey-based business HubEurope and the UK parcel delivery service Hermes does nothing to change his mind.

Fulfilment company HubEurope is one of two successful applicants awarded postal operator licences for the conveyance of bulk mail by the Jersey Competition Regulatory Authority (JCRA). The company styles itself “the home grown postal provider” with a logistics background stretching back more than 20 years. The JCRA decision means that HubEurope can compete with the incumbent postal operator Jersey Post for the millions of parcels and packets delivered to the UK each year.

HubEurope Managing Director Chris Bee said, “We are a wholly Jersey based operation and I would suggest that we are as ‘genuine Jersey’ as Jersey Post. The emergence of competitive delivery options for the Island’s bulk mail industry can only support and encourage existing businesses, guarantee the continuity of over a thousand local jobs and offer the opportunity for growth and an increasingly bright future.”

Hermes is part of the German Otto Group and in mid-2009 the company introduced a consumer-to-consumer service branded “MyHermes”, backed by a UK network of 7,500 couriers. CEO Carole Woodhead makes no secret of her desire to compete for the low value parcels business. At the launch of the new operation she said, 

“The Royal Mail dominates this sector and most people think of it when sending a parcel; we want to challenge that.”

HubEurope’s deal with Hermes means that individual low value parcels can be consolidated in Jersey or Guernsey and shipped to Southampton in the UK from where are delivered by Hermes direct to homes in all parts of the country. On its website, HubEurope publishes a live KPI (key performance indicator, currently at 97.48%) for delivery to the UK within two days.

The UK is not the only EU country in which there are concerns about LVCR. The European Court of Justice (ECJ) ruled on a dispute between Dutch authorities and a transport company bringing packaged media from a distribution centre (DC) in Switzerland to a DC in the Netherlands, before onward delivery to individual consumers by post.

Although it might seem obvious that the goods entered the country in one large consignment and therefore VAT is due – which the national authorities maintained – the ECJ said that since each parcel was individually addressed prior to arrival in the Netherlands it would be an unreasonable administrative burden to account for the VAT on each item.

The court pointed out that suppliers incurred greater transport costs than competitors operating within the Netherlands, which mitigated the alleged distortion caused by LVCR. It also said that there is no requirement for delivery of goods through the postal system in order to qualify for relief.

The ECJ concluded, “As long as each parcel within the grouped consignment was under the limit, each one was individually addressed to an EU consignee and the goods were despatched directly from a third country to those consignees, the relief from import duty should apply.”

Although the Court left the door open for national fiscal authorities to investigate individual cases of deliberate tax avoidance, Chancellor Osborne will no doubt consider this decision prior to any future action.

Which leaves the intriguing possibility that the 33 discs in the complete boxed set of “All Creatures Great and Small”, including Christmas specials, might one day arrive in four or five separate, low value parcels to be assembled at home. 

The consumer saves over £20 on the RRP by not paying the VAT and for the moment, it is legal.

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