ITR: Why LVCR abuse may be unpoliceable
With permission from International Tax Review, we have repeated their entire article below.
When LVCR was first introduced to free up intra-community trade in 1983, EU member states still had cumbersome customs borders and it made little sense to slap VAT on low-value samples being sent between jurisdictions. When the customs borders came down in 1992, LVCR was quickly forgotten, but with the advent of the internet and the mass expansion of mail order, the close proximity of the extra-EU Channel Islands provided the perfect loophole for large retailers selling to UK customers to avoid paying VAT.
Under pressure from the EU and domestic taxpayers struggling to compete with their offshore rivals, the loophole has now been closed, but as International Tax Review reported last month, Channel Island retailers are looking to ship goods into Germany and Belgium to claim LVCR there on products addressed to customers in the UK.
New evidence uncovered by International Tax Review suggests that the EU’s final importation rules make it very difficult to prevent companies from circular shipping to abuse LVCR, even though member states retain the right to set their own LVCR thresholds and exclude mail order goods.
LVCR is granted on final importation, which traditionally was the country in which the customer resides. Since the customs borders were removed, however, LVCR is granted in the member state in which the goods enter the EU under the presently accepted definition of final importation. After which goods can move freely through customs.
“Generally speaking, the place of final importation is the EU country where the goods are cleared for free movement in the EU - the place where the goods have been formally imported,” said Mark Agnew, senior VAT consultant at Baker & McKenzie. “Usually this is the country of point of entry, though it is possible to bring goods into country A under one of a number of customs regimes that means that goods are not cleared for free import, and then move them on to country B where the import is declared and the goods are cleared.”
Agnew believes this means that if goods are import cleared in Germany then shipped onto the UK then in theory there is little the UK can do to police this because they cannot deny a supplier claiming LVCR in Germany.
If this is true, then despite the UK removing LVCR from Channel Islands mail orders, a right guaranteed by the EU, it has little ability to police companies attempting to circumvent this.
Peter Mendham, VAT consultant at Allen & Overy, confirms the view that if the goods are put into free circulation in Germany then the German LVCR threshold will apply and once the goods have been released into free circulation packages addressed to individuals are not subject to any further control.
“What makes the LVCR such an effective way of importing low value items in bulk is that a container or rail wagon can be filled with packages addressed to the intended recipients and it is treated as multiple consignments rather than a single consignment, thereby enabling each package to fall within the conditions for LVCR,” said Mendham.
Mendham points out that though EU law does allow some discretion as to the value threshold, member states have to find a balance between protecting themselves from what they see as abuse of the relief and putting themselves in a position whereby they have to calculate and collect duty and VAT on a multitude of low value importations.
Les Allen, senior VAT consultant at DLA Piper, expects that if the UK authorities become aware of further LVCR abuse, they will raise the issue with the Commission to seek to close any loophole.
Richard Allen, of Retailers Against VAT Avoidance Schemes (RAVAS), points out that member states do not have any discretion with regards to allowing abusive avoidance or evasion, despite the letter of EU law. He is concerned at the debate over the final importation rules in relation to LVCR.
“Since 1988 member states have had the option to exclude mail order goods completely and collect VAT on mail order,” said Allen. “According to the lawyers that power is unenforceable.”
“What appears to have happened is that when the customs borders came down LVCR was not transposed correctly into the single market,” Allen added.
Based upon the intent of the relief up to that point, Allen believes it cannot be right that LVCR was ever intended to be granted by one member state for delivery in another.
This would suggest that LVCR rules are anachronistic and in need of reform, particularly where companies are using circular shipping to get around closing loopholes.
“In the short term I think EU law should be immediately altered so that it cannot apply to goods that are re-imported and can only apply to the packet when it arrives at its destination,” said Allen. “Order splitting should also be classified as an abuse. It should in the longer term be scrapped as it was introduced to help the pre-single market in a pre-digital age.”
Allen believes LVCR is no longer required and that to suggest processing lots of packages is expensive is farcical.
He wants the new VAT rules coming in 2015 to be applied to mail order in the same way as digital downloads. This would force retailers to register for VAT in the EU.