VAT loophole’s potential closure could benefit stores

Leaked letters from Treasury minister Stephen Timms revealed the Government believes online retailers’ exploitation of VAT relief rules affecting goods sold for less than £18 could be “abusing” European law.

In order to qualify for low value consignment relief, some retailers ship product from the UK to the Channel Islands then back again, a practice known as “round-tripping”.

Products shipped into the UK from the Channel Islands qualify for VAT relief because the territory is outside the EU. Whitehall may step in to address the situation.

Entertainment group HMV is thought to benefit by about £8m a year from having a Channel Islands base for online operations. An HMV spokesman said: “HMV has a
robust structure and significant stock in our warehouse. We don’t round-trip.”

One source close to HMV said it might even benefit from a change in the rules. “HMV would be at an advantage if the Government decided to close the loophole tomorrow. Everyone would be on a level playing field, but HMV would have the advantage of having stores,” he said.

Michael Ross, director of online services specialist eCommera, agreed but was not convinced the law would be altered. He said: “It is a big if, but if it does happen it would shift power back to the likes of HMV.”

He said other retailers without specialist entertainment stores could suffer if the rules change. WHSmith and Argos, for instance, have both outsourced online operations to etail and fulfilment
provider The Hut, which has warehouses in Jersey and Guernsey. Ross said changes to the law “would be a threat to The Hut”.

Stephen Hignett, partner in law firm Olswang’s tax department, said it was difficult to predict whether the Government would clamp down on the loophole, but added that any change would “create a level playing field as everybody selling CDs would have to charge VAT”.

A Treasury spokesman said: “The policy remains the same and we continue to look at it.”

Some retailers, such as Play.com, are based in the Channel Islands so are not thought likely to be affected by any change.

No comment was available from The Hut, Argos or WHSmith.