Treasury announces it will close tax loophole next year

A loophole that has let people in the UK buy VAT-free goods from the Channel Islands, such as DVDs will end next year.

The savings given to consumers through the loophole, Low Value Consignment Relief (LVCR), have been enjoyed by millions of people.

But the arguments against giving this tax relief to retailers which have bases in the Channel Islands are two-fold. Yes it has benefited consumers and larger retailers such as Play.com, Amazon and Tesco, yet it is seen as unfair to other smaller retailers based on the mainland. The Government also dislikes the fact that it loses around £140m a year in tax revenue.

It was announced in the Budget this March that the amount of LVCR on goods sent from Guernsey and Jersey was to be cut on 1 November from £18 to £15. However from 1 April next year, this tax relief for goods coming from within the European Union will be stopped completely. Low cost goods sent from outside the EU will still be covered by the tax.

David Gauke Exchequer secretary said: "These reforms will ensure that UK companies, especially small and medium sized enterprises, can compete on a level playing field with those larger companies with the resources to set up operations in the Channel Islands. We are also protecting a significant amount of tax revenue."

LVCR was originally set up as a cost saving measure for EU companies. It saved them the having to collect small amounts of VAT which was not efficient or cost effective.

However UK retailers developed what is called ‘circular shipping'; shipping goods out to the Channel Islands for repackaging and then selling them back into the UK via mail order.

The number and amount of goods being sent by larger retailers from the Channel Islands back to the mainland increased substantially, especially as the cost of VAT rose.