It
would be hard to imagine somewhere less likely to be touched by the
slick metropolitan fingers of the web economy than the Channel
Islands.
Ruled by medieval-sounding bailiwicks according to self-written
laws in an ancient-sounding francified English, Jersey and Guernsey
are famous as the sunny, well-to-do tax havens of retired generals
and yacht-owning magnates.
Yet some of internet retail’s biggest names are setting up to do
business there and e-commerce is fast becoming a mainstay of the
Channel Islands’ economies. Tesco, Sainsbury and Play.com are all
reported to have operations on one of the Islands and many smaller
businesses conduct e-tailing from there.
Behind the seemingly incongruous boom in web trade is a quirk in
European VAT law that means that the leanest competitors in the
market for small goods make sure they ship from the Islands.
Anyone shipping goods to the EU would normally ensure that VAT
is paid when those goods are sold on. There is, of course, a cost
to charging VAT: someone has to track goods, fill in forms, collect
the revenue and pass it on to the tax man.
To collect VAT of a few pence by a process that costs
considerably more than that makes little sense, so the EU
introduced the Low Value Consignment Relief (LVCR), an exemption
from VAT for all goods valued under £18 imported from outside the
EU.
Eventually, web retailers realised that they could make a virtue
out of the Channel Islands’ complicated constitutional set up. The
Islands are outside the EU but loosely connected to the UK. They
are a protectorate of the monarchy and islanders are offered
qualified UK citizenship, affording them the best of both worlds
when it comes to trading advantages.
It turns out that that discovery came about fortuitously when
discount CD and DVD retailer Play.com started trading. “Play.com is
owned by Jersey residents and they realised almost by accident that
they had a VAT advantage,” says Frank Gee. Gee is a director of
Basel Trust, a company which helps other firms to navigate the
complicated strictures placed on anyone trying to take advantage of
the anomaly.
The business advantages of offshore fulfilment can be
significant. In competitive, price-sensitive markets, such as CD
retailing, being able to pass on a discount of 17.5% can make a
serious difference to a company’s prospects. Other firms might
choose not to pass on the discount but to boost their own profits
by the 17.5%. That, again, will make an enormous difference to any
company.
Jersey has tightened up its rules on who can and who cannot take
advantage of the tax benefit. Some retailers have tried to
establish a minimal presence, simply sending goods via the Jersey
postal system in an attempt to win VAT exemption.
Now, the Jersey authorities are thought to be imposing
restrictions on trade in order to encourage more employment there.
Gee said that, ideally, the entire buying process must take place
in the Channel Islands, including the order acceptance, contract
ratification and the conclusion of the order.
The best way to do that, he says, is to establish a separate
company in the Islands to carry out this activity. The setting up
and management of those companies is his business. “We find
directors and manage the companies for clients,” he says.
The most visible success story so far has been Play.com, but
companies are now entering the market selling golf equipment,
herbal remedies and iPod accessories free of VAT.
Anthony Moxon runs Bentham Ltd. The business began in Somerton,
Somerset, selling printer supplies and stationery to businesses by
mail order. Then Moxon saw an opportunity in the consumer market.
“With the explosion in digital photography and use of the web and
the growth of broadband, the amount of printing from home has
increased substantially,” said Moxon. “We determined to get
involved in that business.” They launched IJT Direct, selling
inkjet and laser toner cartridges online, and based their sales,
fulfilment and customer support operations in Jersey. “We went to
Jersey for the VAT advantage,” he said. The vast majority of the
products IJT sells are under £18. “We have a substantial number of
products priced at £17.99,” he said.
The B2C brand currently takes over 1,400 orders a day, turns
over £975,000 a month and, in Moxon’s words, is “jolly
profitable.”
Where would Moxon be without the VAT benefit? “We would grow
considerably more slowly and be considerably less profitable,” he
said.
Moxon credits Basel Trust with getting his company started on
Jersey and Basel Trust reports more and more retailers taking an
interest in the tax breaks that attracted Moxon’s company.
“Business is growing exponentially,” says Gee. “It has really
happened here in the last three years. The competitors of companies
who do this are realising that they have to do this to
compete.”
Tax exemptions can have a short life once publicised, but the
Treasury told OUT-LAW that it has no plans to lobby the EU for a
change to the system. “Using that relief to sell goods to customers
free of VAT is completely legal and falls within the tax code. We
are keeping a close eye on it but we have no plans to change it,”
said a Treasury spokesman.
“People are free to use the tax system how they see fit as long
as it is within the law and revenue and customers have no problem
with it. The tax code is a huge document and where some people see
loopholes other people see opportunities,” he said.
Small music retailers lobby the Treasury to abolish the
exemption, and large retailers lobby it to increase the ceiling
from £18 to anywhere up to £100, but the Treasury sees no reason at
present to lobby for change, since such a change would have to
apply to trade with the US, Japan and the rest of the world.
In the meantime, the Channel Islands’ reputation as a tax haven
continues, but this time the savings are available to ordinary
consumers when they buy golf balls, CDs or printer refills.
Things you may not know about the Channel Islands
Businesses on the Channel Islands are able to take advantage of
VAT-less selling because of their extremely unusual legal position.
They are, in a sense, half in and half out of the UK. While the UK
is responsible for the islands' defence, citizenship and diplomacy,
the islands are not part of the UK, rather they are part of the
Duchy of Normandy.
Britain's Queen is the head of state, but can be called the Duke
of Normandy there; islanders are British citizens but not European
citizens, since the islands are outside the EU. They receive
British passports but modified ones which say which island they are
from.
Jersey and Guernsey are governed by their own parliaments, the
States, which can pass their own laws or pass UK laws as their own.
The VAT exemption is possible because, though part of the Customs
Territory of the European Community, the islands are not in the
European Union, and are able to trade goods into the EU from
outside it.
This feature, by Matthew Magee,
originally appeared in Issue 15 of OUT-LAW Magazine. If you don't
already receive the 16-page Magazine, you can get a free subscription.
