UK Abolishes Reviled Tax Loophole Undercutting CD, DVD Sales
UK Abolishes Reviled Tax Loophole Undercutting CD, DVD Sales

A controversial sales tax loophole that enabled mail-order retailers based in the Channel Islands to sell reduced cost music product to U.K. consumers is to be abolished by the British Treasury.

The islands, located near the northern coast of France, are British Crown Dependencies, and as such are technically separate from the United Kingdom proper, allowing for the tax loopholes. But on April 1st, 2012 the U.K. government will close the tax relief concession, which allowed retailers such as Play.com and the Hut Group to sell CDs and DVDs free of VAT (value added tax; equivalent to sales tax). The announcement follows years of campaigning from mainland-based independent retailers who said that they were unable to compete with the low-cost prices offered by offshore mail-order merchants and were being forced out of business as a result. VAT in the United Kingdom is currently set at 20%.

The growth of low-cost mail-order retailers such as Play.com and the Hut Group is often cited as a contributing factor in the falling price of music product in the United Kingdom, as well as the decimation of the country's music retail landscape, with independent outlets particularly hard hit by the loophole. Play.com was sold to Japanese e-commerce operator Rakuten for £25 million ($39 million) in September this year.

To capitalize on the tax breaks that the waiver known as "Low Value Consignment Relief" (LVCR) enabled, leading entertainment retailers such as HMV, Amazon and supermarkets such as Tesco and Asda also outsourced their mail-order businesses to offshore bases.

The tax loophole, which only applies to goods that cost under £15.00 ($24) which was recently reduced from £18.00 ($28.6), is estimated to cost £140 million ($223 million) a year in lost tax receipts, according to Her Majesty's Treasury. Following next year's abolition of the tax concession, the majority of mail-order companies based in the Channel Islands (predominantly the islands of Jersey and Guernsey) are expected to relocate to other tax beneficial territories such as Switzerland or Eastern Europe. Up to 1,000 jobs are said to be threatened.

"These reforms will ensure that U.K. companies, especially small and medium-sized enterprises, can compete on a level playing field with those larger companies with the resources to set up operations in the Channel Islands," said David Gauke, Exchequer Secretary to the Treasury, in a statement.

"We are also protecting a significant amount of tax revenue. By making these changes, we are striking the best possible balance between the costs of collecting small amounts of VAT and protecting the interests of U.K. taxpayers and businesses," Gauke went on to say.

The news that the tax break was to be abolished was welcomed by the U.K. retail community. "The removal of this major market distortion should be welcomed by all U.K. businesses that wish to trade online," said Richard Allen, a spokesperson for pressure group RAVAS (Retailers Against VAT Avoidance Schemes).

"We hope that the UK Government and EU will now remain vigilant and ready to close down any similar schemes should they develop in other locations. The Channel Island's VAT loophole has over many years destroyed livelihoods and caused much misery in the U.K. business community," Allen continued, adding that he was "sympathetic to those Channel Island employees who may lose their jobs as a result of the ending of this industry."