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Online DVD and CD VAT ‘dodge‘ under fire from customs


Online retailers shipping out of the Channel Islands to dodge VAT on the sale of low-cost goods are abusing a tax loophole, according to a leaked Treasury letter.

Until recently, ministers have allowed online retailers to exploit of VAT relief rules on imported goods costing less than £18 was "not a loophole”, but the practice was "under review". Any change in the VAT rules could drastically affect the online sales of DVD and CDs for companies like HMV, Amazon, Tesco, WH Smith, Asda, Argos, and Woolworths.co.uk - and several low-profile offshore distribution specialists.

The rules allow companies sourcing low cost goods from outside the UK to VAT relief, making the goods cheaper and more attractive to UK online customers.

The Government believes many companies are breaking the rules to save cash and increase sales by sourcing goods in the UK and send them to the Channel Islands so they can sell them without charging VAT.

The Treasury suggests VAT-free sales to the UK from the Channel Islands were £620m last year, creating a £110m tax loss for the Government. Some believe these figures are under estimated as market research firm TNS says 28% of DVDs and 23% of CDs purchased by customers in the UK are bought from the internet, which adds up to far more than £620 million in sales.

HM Revenue and Customs is ready to test the VAT relief rules with a precedent set in a European Court of Justice case involving the Halifax, which established an "abuse of rights" principle that invalidates complex tax structures designed to secure a tax advantage.

Customs officials are looking to take on one or more big name companies as a test case. HMRC considers complex shipping arrangements amount to an abusive tax structure under the Halifax ruling.

One of the letters states HMRC regards some arrangements "for goods to be imported from a Channel Island to benefit from low value consignment relief" are "an abusive practice".

The letters also reveal explains customs officials have already challenged one company, but no precedent was set as the business accepted they incorrectly accounted for VAT.


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