The Forum of Private Businesses (FPB) this week asked the Chancellor to close a tax loophole that lets Channel Islands-based companies sell inexpensive products like DVDs and CDs to UK consumers free of VAT.
The lobby group, which represents small and medium-sized firms, raised its concerns after Tesco.com ignited a price war by slashing 10% off all CDs, DVDs and video games for this week only provided by its Tesco Jersey operation.
The 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 which, a loss that he expected to rise to £200m in the next couple of years. The loophole is also affecting SMEs.
FPB member Richard Allen, Managing Director of Delirium Mail Order said his business's future was now "on the line" as a result of the tax dodge.
"The Government needs to close this loophole now before it is too late and people like me go out of business," said Allen. "It's absolutely ridiculous and unfair that I cannot make ends meet and pay my VAT bill. This is because big retailers are fatally undermining my business by avoiding charging VAT and pricing me out of the market as a result."
The FPB's Chief Executive Nick Goulding said the price war had come at the worst possible time for independent retailers in the run up to the most vital period in the retail calendar.
"Independent high street and web-based retailers are facing a very bleak Christmas indeed as they cannot possibly compete with the Channel Islands price war," said Mr Goulding. "We fear that the other Channel Islands based retailers like Asda, Woolworths, HMV, Amazon and Boots will follow Tesco.com and ruthlessly take advantage of the tax dodge.”
The FPB is calling on the Treasury to close the loophole by lowering the price level on goods for which VAT is exempt from, from €22 to €10 (about £7) – rendering the trade unprofitable.
The lobby group also urges the Treasury to seek a dispensation from the EU to close the loophole. This is a drawn out process, says the FPB, but a similar dispensation has been granted to the Danish Government.
The National Audit Office is currently investigating the amount of tax being lost by the Government through the Channel Islands as part of a study it is undertaking on e-commerce. A full report is expected early in the New Year.
Meanwhile, Amazon.co.uk has complained to the Advertising Standards Authority about the Tesco Jersey promotion – which claims cheaper prices than Amazon.co.uk. Its complaint that Amazon Jersey is sometimes cheaper than Tesco Jersey was rejected; but another complaint, that Tesco's claim was misleading because it did not take into account Amazon's free delivery offer on orders over £19 through the mainland UK site, was upheld.
