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MU back complaint over Jersey tax loophole
By CMU Editorial | Published on Wednesday 31 March 2010
The Musicians’ Union has made a submission to European Union’s Taxation Directorate in support of a complaint regarding the much reported tax loophole that exists on the Channel Islands which lets mail-order CD operations undercut mainland record sellers because they don’t have to pay VAT on sales.
This is a long running story. Companies selling goods that cost £18 or less from a Channel Islands base to customers in the UK do not have to pay VAT on the sale. The loophole exists because of the Channel Islands’ quirky status, outside the UK and European Union, but under the British crown and within the European Community customs zone.
The loophole has been particularly utilised by mail-order enterprises which sell products that usually retail below £18, and especially the mail-order CD business. Most of the bigger online CD sellers base their actual mail-order operations on Jersey or Guernsey (or, more often these days, outsource the fulfilment to another company based there), which means they don’t have to charge VAT on CDs sold, enabling them to automatically undercut mainland based retailers by 17.5% without cutting their profit margin.
CDs get shipped over to the islands in bulk from the UK, and then mailed back to the mainland one by one. The extra logistical costs doing that causes are more than compensated for by the competitive advantage not having to pay VAT gives those retailers who use the loophole.
As it is generally the bigger retail firms who can afford to have Channel Island-based operations – so the HMVs, Tescos and Play.coms of this world – it is generally smaller independent retailers who have lost out as a result of the loophole (well, them and the British tax payer, who are losing 17.5% of income from every CD sold). So much so, many reckon the loophole has played a key role in the widely reported decline in the number of independent music shops operating in the UK in the last five years, because for indie retailers to compete with the bigger online operations they’d have to forego pretty much their whole profit margin on a CD.
Both the British and Jersey governments have, at times, criticised the loophole and implied they would do something about it, though the whole thing has since been conveniently forgotten. After getting increasingly frustrated with the attitude of the British tax authorities to the loophole, a group who have long campaigned against the tax fudge recently took their complaint to the European authorities.
They reckon the British government has failed to fulfil a duty set out in the European directive which governs the ‘VAT relief’ in question. In particular, the group says that the directive obligates tax authorities in each EU state to implement the relief in a way that “prevents evasion avoidance and abuse”, something they feel the UK Inland Revenue has failed to do. The same directive gives UK tax officials the power to reduce the maximum price point that could benefit from the VAT relief or to exclude whole categories of trade, in other words the UK Government could reduce the price point to £7, ie less than most CDs, or just exclude all mail-order if the relief is clearly being used for tax avoidance.
It is that complaint to European tax bosses that the Musician’s Union this month formally supported. Their submission says: “Not only has this practice created a tax loophole that costs HM Treasury a significant amount of money, it also, we believe, constitutes an abuse of rights because it uses legislation for a purpose contrary to the original purpose of the legislation”. The submission adds that the practice has had a number of detrimental effects on the UK music market, mainly by giving larger retailers a considerable unfair competitive advantage over independent retailers and artists wishing to sell their own music via their own websites.
Welcoming the MU’s support, one source close to the complaint told CMU: “This VAT avoidance arrangement has been the main reason that UK mainland-based music retail has been collapsing since 2005. The effect of VAT abuse on UK retail has been masked by the media’s obsession with downloads. The reality is that the major retailers continue to make healthy profits from the sale of hard physical product, hence the reason they have been so keen to rush offshore to sell it VAT-free back into the UK. We hope that the European Union will take clear action on this abuse of core EU VAT legislation and rule it as the abuse it clearly is. If they don’t do so, then essentially VAT in the EU on mail order will be a meaningless concept, as it has already become in the UK due to the inaction of HM Treasury”.
The EU’s Taxation Directive is expected to respond to the complaint later this year.
