Chancellor George Osborne is planning to crack down on cheap goods flooding into the UK from the Channel Islands.

Companies can exploit a VAT loophole currently that allows them to sell goods online free of VAT from the Channel Islands, undercutting high street stores.

But Osborne is expected to tighten the loophole that is costing the treasury about £110m a year.

With VAT rising to 20% this year, high street shops have found it even harder to compete.

Low Value Consignment Relief exempts goods valued under £18 imported from outside the EU from VAT. The Channel Islands are classed as sitting outside the EU for tax purposes, in order to protect their fresh flowers market.

Osborne is expected to reveal in his budget this week that he will reduce the threshold from £18 to £8, putting a stop to the majority of offshore trade., Amazon, HMV, Asda, Tesco and Sainsbury’s have been exploiting the loophole in order to sell cheaper online goods.

CDs, DVDs, computer memory cards and other items including contact lenses and cosmetics are being sold free of VAT.

Smaller retailers have been lobbying government to close the loophole for some time, led by pressure group Retailers Against VAT Abuse Schemes.