In a policy shift, the government now plans to impose a time
limit of one year on some retail licenses.
The tax loophole is the result of European rules that allow
companies based outside the EU (including the Channel Islands) to
supply goods direct to customers within Europe free of VAT,
provided they cost less than £18.
Accordingly, Channel Island firms are able to sell goods at a
considerably lower price than firms based in the UK, which have to
include the UK VAT rate of 17.5%.
In the past few years, many UK retailers – including Asda,
Tesco, Amazon, Boots, HMV and Woolworths – have taken advantage of
the loophole to set up bases in the Channel Islands, from which
they can sell inexpensive items online to UK customers, free of
VAT.
But the loophole is having an effect on tax revenues. Government
Minister John Healey told a Treasury sub-committee meeting in
February 2005 that the Treasury is losing £80m a year in revenue
from the activity, a loss that he expected to rise to £200m in the
next couple of years. The loophole is also affecting SMEs, whose
businesses are undercut by the cheap goods.
Critics have been campaigning vocally for a change in the law,
and the Jersey government fears that the resultant negative
publicity “is in danger of undermining the Island’s good
international reputation and integrity.”
It has therefore issued a policy statement dividing the sector
into two:
- Whole Chain Companies (WCC), which physically buy stock and
sell it on to final customers, and therefore receive revenue on the
sales made.
- Third Party Service Providers (3PS), which provide distribution
services to other retailers and are paid for the service not the
product sales.
According to the Jersey government, WCCs contribute tax and
provide good jobs for local people and should therefore be
permitted. 3PS activity, on the other hand, has less value and the
selling structure used by 3PS firms “is little better than a
sham”.
“Jersey’s integrity in financial and commercial matters cannot
but be damaged by the use of the Island as part of such a selling
structure,” says the policy statement.
The government has therefore decided that, while it will support
existing and new WCCs, belonging to Jersey residents, 3PS companies
will be granted time limited licences of one year to allow them to
“gradually reduce and eventually to discontinue their
activities”.
High value firms that combine both WCC and 3PS, or do not fit
easily into either category, will be supported where they “do not
involve UK companies diverting current business through the Island”
or where they are not companies trading DVDs and CDs into the
UK.
The move has been supported by the Guernsey government which,
according to the BBC, has now warned firms that they would not be
welcome to get round the time limit by moving there.
"Our priority is to ensure that our local, home-grown businesses
that are Guernsey-friendly are looked after and given the best
advantage possible,” Deputy Minister for Commerce and Employment
Carla McNulty-Bauer told the BBC. “We do not want those companies
to be prejudiced against in any way."
Critics are concerned that the move does not go far enough.
“If Jersey is serious about this crackdown, and it has made
similar claims before, it has to state when the retail giants will
have to leave," said Nick Goulding, Chief Executive of the Forum of
Private Business. "That is the true proof of a crackdown. However,
although this announcement is a tremendous step forward, providing
it happens, much of the problem will remain as businesses based in
Jersey, like Play.com, will still be able to exploit the
loophole."
The policy shift comes in the same week that the European Court
of Justice ruled against optician Dolland & Aitchison in a case
brought by HM Revenue and Customs over the VAT loophole.
The Court found that the optician should have included the cost
of eye-tests in its charge for contact lenses, with the result that
it was liable for VAT.
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