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.