From Tax Research UK, Director Richard Murphy
CHANNEL ISLANDS LVCR FULFILLMENT INDUSTRY
This letter was published in the Guernsey Press today (but I can’t find a link as yet)
In your article “becoming a target of convenience” (4th March 2011) you seem to imply
that the Channel Islands LVCR fulfillment industry has become some kind of imaginary
scapegoat for the demise of independent UK music retailers. You say that “research” has
shown that supermarkets are the problem. Presumably the research to which you are
referring to is the boldly titled report Setting The Record Straight, which was announced
with much fanfare in the Channel Islands press a couple of weeks ago but which the
Guernsey Government seem to be very reluctant to let anyone see.
Needless to say I have been dealing with objections like this for a very long time. They
are exactly the kind of thing that people with a vested interest in seeing this immensely
distortive and unjust practice continue have been feeding to HMRC for years. So,
for the record: supermarkets entered the music market 15 to 20 years ago, serving
an entirely different part of the market (top 40 chart CDs aimed at young people or
those with a passing interest in music) to that served by most of the independent
sector (music for serious music consumers, leftfield and experimental bands, new
upcoming independent artists, back catalogue and collector music). Supermarkets have
not significantly changed their position in the market in the last 10 years. However,
online sales (of physical CDs, not downloads, which still remain marginal in the albums
market) have risen from 11.6% of the UK music market in 2006 to 29.6% in 2009.
2006 is a pivotal year because that was when HMV’s opening of a distribution centre
in Guernsey (in order to compete with Play.com) caused a stampede to the Channel
Islands. This increase has been disproportionate to the rate at which online sales were
growing before 2006, and far disproportionate to the growth in online sales of books, an
important control group because their exemption from VAT within the UK removes any
incentive to send them offshore.
A business like mine – Delerium Mail Order, a much respected specialist online CD
retailer – should have benefited from this shift to online, because it was a purely online
business. However, there are no independent online stores left onshore in the UK,
save for a few that are attached to high street stores in high footfall areas or selling
exceptionally niche product. Why? Because they have to charge VAT. My business
saw nothing but growth until 2006, then HMV opened its centre in Guernsey, all my
competitors went offshore, and I shut down at the end of 2007 as it became impossible
to retail CDs and charge VAT. According to the CEO of thehut.com, by 2009 96% of the
online music market was offshore.
But even so, there are now many other product sectors experiencing the same market
distortion caused by the abuse of LVCR. Retailers Against VAT Avoidance Schemes
(RAVAS) represents retailers from across many sectors who have the identical tale to
tell of VAT free Channel Islands based websites undercutting them purely through the
avoidance of VAT. The distortion in the market for CDs and DVDs and the destruction of
UK online retail is just an example of what happens when a tax avoidance scheme gets
out of control.
LVCR was never intended for the purposes of avoiding VAT and distorting competition
in favour of tax avoiders, a fact that whilst denied by those with a vested interest
was recently confirmed to me directly by senior HMRC officials. In a way, I feel
some sympathy for the Channel Islands in that that the islands’ position has been
unscrupulously exploited in this way by large retailers and its economy made dependent
to a large extent on an immoral industry that has completely misrepresented the central
tenants of the European Law that governs LVCR. To that end, even though neither I nor
my employees received any compensation when the UK government’s incompetence
and inaction destroyed my business, I would certainly not be against the UK government
helping the Channel Islands out if and when it chooses to end the exploitation of LVCR
via the islands. The UK Treasury will recoup the £100m-200m in VAT that it is now
losing. It would be appropriate if, for as long as is needed for the Channel Islands’
economy to readjust, some of this money could be used to provide some economic aid
to the Channel Islands population that was directly affected i.e. those who are least
able to defend themselves from the consequences of this kind of logistical tax deception.
The main benefit to the UK economy from ending LVCR is in stopping the distortion of
competition and the main benefit to the Channel Islands is to have a fulfillment industry
free from the spectre of tax avoidance.
It can fairly be argued that there would be an impact on the Channel Islands economy if
LVCR were to end. I would like to see the UK government address this in order to repair
the damage caused by its inaction in preventing the development of a Channel Islands
economy partly based on tax avoidance.