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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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