Unfair VAT Relief to Change

How many small businesses can afford to send their low value goods to the Channel Islands for storing, packaging and resending out to customers in the UK? All to avoid having to add VAT to the purchase – a significant competitive advantage.

Large organisations have been doing it for years through the Low Value Consignment Relief (LVCR) arrangement whereby goods with a value of below £18, and more recently, £15, from outside the EU are VAT free. But from 1 April, 2012, this VAT relief from the Channel Islands will cease, as announced by the Chancellor in his 2011 Autumn Statement.

Bad News for Some

It’s bad news for the major retailers who have been taking advantage of it. There will be no advantage for them of sending their goods out to the Channel Islands any more, and they will certainly be making other arrangements. So it’s also bad news for island workers in the fulfilment industry, the ones who facilitate the logistics of this kind of order fulfilment. They will not be needed any longer. Others who are likely to suffer are island residents who will probably face higher postage costs and possibly air travel costs as the volumes of post and transport requirements reduce. And it’s bad news for the consumers who have been buying these goods without having to pay VAT on top.

Good News for Others

Perhaps it’s good news for you. It’s certainly good news for smaller operators for whom the cost of making such arrangements would outweigh any benefits from the LVCR. They have been making reduced profit margins because of having to compete with the lower prices of goods with no VAT added. They see this new legislation as levelling the playing field and making the competition fairer.

It is also good news for the Treasury which stands to gain in the region of £100 million or more in additional tax revenues.

Is it Legal?

Since VAT is an EU law requirement in member countries, it has been argued that this proposed change is a breach of fiscal neutrality. A prominent tax accountant believes that the change should not be implemented without gaining permission from the European Commission for a deviation from the EU law. It could therefore be challenged. If you sell low value goods to consumers, ask your outsourced bookkeepers to keep an eye on the situation, and set a price review date for the next financial year.