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Dropping VAT relief would not harm smaller traders, says business group

4th March 2011

Closing a relief which allows larger firms to move off-shore in order to pay no VAT on items valued at £18 or less would benefit rather than hit smaller businesses, it has been claimed.

The Forum of Private Business (FPB) has said that arguments in defence of the Low Value Consignment Relief (LVCR) are wide of mark if they imply that small traders would suffer should the relief be scrapped.

LVCR, which is a perfectly legitimate tax break, was introduced almost three decades ago as an administrative relief designed to prevent perishable goods from spoiling in Channel Island warehouses.

Under the Low Value Consignment Relief, goods valued at less than £18 can be sent to the UK from outside of the EU without any VAT charge.

This has led to the practice of some larger firms opening warehouses on the Channel Islands. Items are transferred in bulk to the Islands before being re-packaged as orders for individual customers and sent back to the UK.

Smaller firms have complained that they do not have the resources to create similar, off-shore distribution centres or to compete on price.

Supporters of the LVCR say that it helps to keep consumer prices lower and to reduce red tape. But the FPB, which has been campaigning for a change in the law, counters by arguing that the LVCR makes the tax system unfair and distorts competition, hitting small high street shops and online retailers.

Although legitimate, an EU directive means that the LVCR cannot be used if it leads to tax abuses and skews competition. The FPB believes that it does both.

The Treasury has agreed to examine the tax break and the issue will be addressed in the forthcoming Budget.

In order to tackle the problem, the FPB wants the Government to adopt one of a number of strategies. These could include challenging schemes and company structures designed to allow circular shipping of UK/EU goods as abusive tax avoidance arrangements; lowering the LVCR threshold; removing mail order goods from the relief on a country-by-country, product-by-product basis; or removing entire products from the relief.

Jane Bennett, the FPB's head of campaigns, said: "The very notion that this Channel Islands VAT loophole benefits small businesses is completely wrong.

"The story we have been told is vastly different and is backed by evidence - the abuse of Low Value Consignment Relief has been a major factor in the rapid decline in small high street shops, as well as private online retailers.

"The Government simply must act in the upcoming Budget to close this unfair, anti-competitive VAT avoidance loophole. The economic future of our villages, towns and cities is at stake and, given the hundreds of millions in tax revenue lost each year by HMRC, it is mystifying that it has taken until now for something to be done."

Ms Bennett added: "The argument that getting rid of this tax loophole would be bad for consumers is a grossly misleading one. This is about creating a level playing field which will ultimately benefit consumers by increasing choice and competition."