Monday, August 17, 2009

Channel Island VAT abuse: time for action

The Observer reports that online retailers are facing a crackdown on the use of the British Channel Islands to exploit a VAT loophole. Such a move would be very welcome.

The so-called 'fulfillment industry', which operates out of Jersey and Guernsey, is a bizarre example of the law of unintended consequences. Back in the dim mists of time both islands had significant horticulture sectors which, due to geographical advantage and proximity, prospered from selling fresh flowers direct, by post, to British consumers. There was a slight hitch, however. Neither islands were part of the UK VAT regime (having opted in the late 1960s to stay outside the European Economic Community) and their flower exports were liable to VAT on entry into the UK, which would have both increased the final price to consumers and potentially incurred shipment delays as the packages cleared customs. So a deal was struck specifically for the horticulture sector: postal packages shipped from the islands below a certain threshold (known in the current jargon as low value consignment relief) would be exempted from VAT. This token gesture satisfied everyone, allowing cartons of perishable daffodils to arrive on the doorstep fresh and blooming in time for the all-important Mother's Day in March.

So what could go wrong with such a sweet and simple arrangement? Quite a bit as it happens. Guernsey and Jersey flower exporters started to source their produce from outside the islands, importing produce from far and wide and re-exporting - mainly to the UK markets - under the Jersey produce label. When we say far and wide we mean it. At one stage carnations were being imported from Colombia and re-exported under this VAT exemption. Rumours persist in both islands that flowers exports from Latin America were being used to launder proceeds from narco-trafficking, but in the spirit of The Three Monkeys the local regulatory authorities did nothing. Needless to say UK retailers suffered from this abuse of the special concession, but since when has HM Treasury worried about the small retail sector?

And then in the 1990s the big boys moved in. Never particularly worried about the niceties of things like gentleman's agreements and "playing a straight wicket", the government's in Guernsey and Jersey - both of which directly profited from additional postal revenues - turned a blind-eye as new products joined the cut flowers exports. Pharmaceutical products, CDs, then DVDs, and other items liable to VAT, were shipped into Jersey, briefly warehoused, and then onwards posted to customers in the European Union. This was (and remains) an economic madness involving huge additional transport charges, hundreds of millions of lost VAT revenue, and micro-economic distortions favouring large online operators (including WalMart/Asda, Amazon, Tesco and Woolworths [RIP]) who enjoy an indirect subsidy not available to small retailers. But since when has HM Treasury been worried about competition policy in the UK, where tax policy largely consists of tax breaks for rich and powerful organisations, with others taking up the slack?

As The Observer notes, the European Court of Justice has established an 'abuse of rights' principle which invalidates complex tax structures designed to secure an extraordinary advantage. Exploiting a VAT exemption intended to allow rapid postal entry of fresh cut flowers to the Mother's Day market to fulfil internet orders for DVDs, CDs and other low volume, high value items seems to fall into this category. It is time to kick this particular abuse as far as possible into the long grass.


Blogger Physiocrat said...

Make one mistake and it sets off a whole chain of trouble.

VAT is a nice little job-killer. So it needed an exemption to stop the jobs disappearing. And the exemption gets exploited. It is the usual story with our ill-conceived taxes. Taxes on labour, goods and services need to be mitigated with concessions and every concession creates loopholes. It's what happens when the underlying principles are faulty.

4:48 am  

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