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E-commerce firms head for tax haven Channel Islands

FEATURE: Internet business is booming in the sunny Channel Islands, all thanks to an unusual tax loophole that has the blessing of Gordon Brown.26 Oct 2006

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.