Wednesday, January 25, 2012

Guest blog: VAT loophole abuse, for beginners

For years UK tax havens such as Jersey have been making hay from an egregious tax loohole called Low Value Consignment Relief (LVCR.) In short, this loophole has enabled UK goods under the value of £18 to be sent in a circular route via the Channel Islands so that they can re-enter the UK from outside the EU free of VAT. It is an absolutely classic example of the way that tax havens can out-compete 'onshore' businesses on a factor that has nothing whatsoever to do with productive efficiency, and everything to do with sucking wealth away from taxpayers. UK Conservative peer Lord Ralph Lucas branded the LVCR loop as "a smuggling exercise... akin to baccy for the parson, brandy for the squire."

Richard Allen, a former businessman who lost his 'onshore' business as a result of this loophole has fought almost single-handedly against this offshore loophole. Richard has written us a short blog illustrating the problem.
Guest blog: LVCR abuse for beginners

There are five market stalls in front of the Houses of Parliament selling CDs. The first four stalls show clear individual prices for their CDs with a note that says “Our price includes VAT of 20% which goes to the UK Government.” The fifth stall shows the prices for the CDs that are displayed along with a note saying “Our price is always up to 20% cheaper than the prices on the other stalls”

A customer goes to the stall selling the cheaper CDs and decides to buy a CD. He pays the attendant who at this point replies “Let me just get this delivered for you with no extra charge”. The attendant puts the CD in a bag, gets into a nearby car with the bag and the CD and then drives to Portsmouth where he gets on a ferry to the Channel Islands. He arrives in Jersey gets off the ferry then hangs around for an hour or so before getting back on the Ferry to Portsmouth. When he arrives he orders a cab to the Houses of Parliament where he then gives the CD to waiting customer with receipt showing NO VAT APPLICABLE.

One year later.....

There are now only two stalls left. A huge crowd of people is gathered around the stall with the discounted prices. The other stall is empty with a sign on it that says “Prices include VAT of 20% which goes to the UK Government.” The nearby Evening Standard news board has the headlines “UK Unemployment up – UK taxes to be increased to account for shortfall”

The attendant for the discounted stall is so busy with orders he now has a lorry to take CDs on the same round trip. Nearby he has parked his brand new Ferrari with the number plate N0 VAT.


Endnote: The loophole has since been modified. As a direct result of the complaints, the UK has removed LVCR from CI mail order items completely as of 1st April 2012 and lowered threshold to £15 from all destinations into the UK.

Further reading on LVCR:
  • A history of the VAT loophole - LVCR site
  • Businessman's fight to stop tax loophole taken up by Lords - Telegraph

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