The noose around a Channel Isles tax loophole that allows companies to sell VAT-free goods such as CDs and DVDs online to the UK is slowly tightening.

Both Jersey and Guernsey have said they will clamp down on companies such as Amazon, HMV and Tesco that use the Channel Islands as a base to sell goods worth less than £18 to UK consumers.

These retail giants have picked up a large chunk of the online DVD and CD market as UK consumer reap the benefit of cheaper prices. HMV is reportedly selling a massive 100,000 VAT-free CDs to the UK a week through its website.

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. He said this loss is expected to rise to £200m in the next couple of years.

Other organisations have also complained saying it is badly affecting small companies on the UK mainland and the Channel Islands by giving the major retailers an unfair advantage. Those campaigning to close the loophole completely, include the Forum of Private Businesses (FPB), which also presented the Treasury with a dossier on the issue, the Association of Independent Music (AIM) and the British Phonographic Industry (BPI).

The Jersey government said it now fears that the resultant negative publicity “is in danger of undermining the Island’s good international reputation and integrity.”

It then set a new policy about which companies could take advantage of this VAT-free zone. It has ruled the likes of Amazon et al are not contributing to Jersey's economy and it has given them a year to find a new base.

Just in case these companies decided to relocate within the Channel Islands to continue taking advantage of the tax break, Guernsey has also said UK retailers would not be allowed to set up distribution bases on there.

However this won't mean the end of these cheaper products because many Jersey-based firms like play.com will still be able to sell using the loophole.

Meanwhile the FPB said Guernsey is making no moves to end HMV’s operation on the the island which it set up and registered there in July 2005.

The other retailers meanwhile are not making public plans to withdraw their Channel Island operations.

A Tesco representative said:" We are monitoring the situation but in the meantime it's business as usual. Our aim is always to give our customers the best possible offer and we will continue to do that."

Amazon also said it was business as usual and it would continue to use its Jersey outlet while its lawyers examined the new ruling to see if there were any ways it could be appealed.