Why bricks and mortar stores are celebrating the LVCR ruling
The failure of the Channel Islands to win their judicial review against Low Value Consignment Relief (LVCR) is a major blow for many online retailers, including popular videogame retailers such as HMV, Amazon and Play.com.
These companies have benefited enormously from LVCR, which has allowed them to sell products under £15 VAT-free. In fact, it is estimated that the loophole is costing the exchequer a whopping £130m each year in lost VAT. That’s a lot, but it isn’t just the public coffers that are emptier.
UK high street retailers have long campaigned against LVCR, arguing that it gives online retailers an unfair advantage. The pressure group Retailers Against VAT Abuse Schemes (RAVAS) has taken a lead role in campaigning against the VAT loophole, and its spokesperson Richard Allen is clearly delighted with the decision of the court. He said:
“The long-term and blatant abuse has destroyed many UK businesses which, other than for the lack of a 20% trading advantage, would have been viable healthy operations giving people jobs and generating tax revenue in the UK.
“While of course we have sympathy for the effect on employment in the Channel Islands that the closure of this industry will have, it is for the people of the Islands to strongly question their elected representatives as to how they could possibly allow an industry that was based on the abuse of tax to become so important to their economy.”
High street retailers are already at a disadvantage against online retailers, which have the more productive and efficient business model. For online retailers to also benefit from tax relief puts the bricks and mortar stores in an impossible position.
HMV CEO Simon Fox, whose company operates a Channel Islands mail order service as well as running high street stores, recently described the the current situation to MCV as being “idiotic”. But while he welcomed plans to close the loophole, he cautioned those who think this will change anything:
“For many years we have said we would like to see a level playing field,” said Fox.“Unfortunately, the legislation closes down Low Value Consignment Relief [LVCR] only from the Channel Islands. It remains to be seen what our competitors will do, but undoubtedly there’ll be a temptation to go to Switzerland or wherever.
“It can’t be helpful to have your VAT rate as a determinant of where you put your warehouse. It’s a basic distortion to fair competition. The closing of LVCR rules is a good thing, but the way it has been implemented doesn’t necessarily solve anything.
“[The situation] is absolutely nuts. Just as it’s nuts for digital service providers – like iTunes and Amazon Kindle – to be located in low tax locations.”
The LVCR ruling is a victory for high street retailers, but even if online stores don’t flee to another non-EU nation, the huge structural advantages they have will ensure the road ahead is still rocky for high street stores.