The
lobby group, which represents small and medium-sized firms, raised
its concerns after Tesco.com ignited a price war by slashing 10%
off all CDs, DVDs and video games for this week only provided by
its Tesco Jersey operation.
The loophole is the result of European rules that allow
companies based outside the EU (including the Channel Islands) to
supply goods direct to customers within Europe free of VAT,
provided they cost less than £18.
Accordingly, Channel Island firms are able to sell goods at a
considerably lower price than firms based in the UK, which have to
include the UK VAT rate of 17.5%.
In the past few years, many UK retailers – including Asda,
Tesco, Amazon, Boots, HMV and Woolworths – have taken advantage of
the loophole to set up bases in the Channel Islands, from which
they can sell inexpensive items online to UK customers, free of
VAT.
But the loophole is having an effect on tax revenues. Government
Minister John Healey told a Treasury sub-committee meeting in
February 2005 that the Treasury is losing £80m a year in revenue
from the activity which, a loss that he expected to rise to £200m
in the next couple of years. The loophole is also affecting
SMEs.
FPB member Richard Allen, Managing Director of Delirium Mail
Order said his business's future was now "on the line" as a result
of the tax dodge.
"The Government needs to close this loophole now before it is
too late and people like me go out of business," said Allen. "It's
absolutely ridiculous and unfair that I cannot make ends meet and
pay my VAT bill. This is because big retailers are fatally
undermining my business by avoiding charging VAT and pricing me out
of the market as a result."
The FPB's Chief Executive Nick Goulding said the price war had
come at the worst possible time for independent retailers in the
run up to the most vital period in the retail calendar.
"Independent high street and web-based retailers are facing a
very bleak Christmas indeed as they cannot possibly compete with
the Channel Islands price war," said Mr Goulding. "We fear that the
other Channel Islands based retailers like Asda, Woolworths, HMV,
Amazon and Boots will follow Tesco.com and ruthlessly take
advantage of the tax dodge.”
The FPB is calling on the Treasury to close the loophole by
lowering the price level on goods for which VAT is exempt from,
from €22 to €10 (about £7) – rendering the trade unprofitable.
The lobby group also urges the Treasury to seek a dispensation
from the EU to close the loophole. This is a drawn out process,
says the FPB, but a similar dispensation has been granted to the
Danish Government.
The National Audit Office is currently investigating the amount
of tax being lost by the Government through the Channel Islands as
part of a study it is undertaking on e-commerce. A full report is
expected early in the New Year.
Meanwhile, Amazon.co.uk has complained to the Advertising
Standards Authority about the Tesco Jersey promotion – which claims
cheaper prices than Amazon.co.uk. Its complaint that Amazon Jersey
is sometimes cheaper than Tesco Jersey was rejected; but another
complaint, that Tesco's claim was misleading because it did not
take into account Amazon's free delivery offer on orders over £19
through the mainland UK site, was upheld.
