Retailers weigh up impact of Channel Islands VAT changes

Chancellor George Osborne’s plans to tackle the VAT tax loophole on goods sold in the UK from the Channel Islands are insufficient to protect music stores, experts believe.

Osborne said in Wednesday’s Budget that he would “tackle the exploitation” of Low Value Consignment Relief (LVCR), which enables the VAT-free sale of goods valued at less than £18 from the Channel Islands, which count as being outside the EU.

Osborne said the practice has “left high street music stores facing a losing battle” as online operations exploit the VAT loophole. He wants to “limit the scope of the relief so that it can no longer be exploited for a purpose it was not intended for”.

Bricks-and-mortar entertainment retailers are being squeezed by etailers and grocers. HMV is currently in talks with its banks about renewal plans.

The Government has still to decide how to address the issue, but will begin to tighten the loophole by reducing the price threshold from £18 to £15 in November.

However, KBC Peel Hunt analyst John Stevenson feared Osborne was doing “too little too late” for high street stores. He said that pure-play etailers would only be “slightly less competitive” as a result of the change announced so far.

Deloitte indirect tax partner David Lyons said: “The impact of these changes will be more limited than had been widely expected. It will still be possible for many items to be imported without customs duties or VAT being applied, and there will be minimal impact to those companies currently using LVCR.”

Retailers ranging from Amazon and Play.com to Asda and Tesco have all taken advantage of the Channel Islands loophole. So has HMV, but observers say its store sales have been cannibalised as a result.

An HMV spokesman said: “We’re still absorbing all the details of this announcement so that we can fully evaluate its implications.”

HMV bosses this week met banks to keep them onside by presenting a turnaround strategy that could include selling off Waterstone’s, a rights issue or the hiving off of its Canadian business. Sources said that restructuring specialists GA Europe, Gordon Brothers and Hilco are all keen to get involved in the latter option. No comment was available from any party.