Jersey and Guernsey pick a fight with UK Treasury

The governments of Jersey and Guernsey are not taking lightly the United Kingdom's decision to exclude the Channel Islands from value-added tax exemptions on low-value goods, under the Low Value Consignment Relief (LVCR) regime. 

In recent years, the Channel Islands have become a hub for many businesses which sell low value goods into the UK (originally those costing less than £18, although this figure has now been reduced to £15), such as CDs, DVDs and toys.  This was because under the LVCR arrangements, companies established in jurisdictions outside of the EU (and the Channel Islands are outside of the EU for these purposes) were permitted to import the goods into the UK and sell them free from VAT.  Big names who took advantage of the scheme include Play.com, Tesco and Indigo Lighthouse.

The UK government faced considerable lobbying from UK based high street retailers, who blamed the LVCR for the demise of their businesses and the UK Treasury responded to this pressure by announcing in November that from April 1, 2012, the relief will no longer be offered to goods exported to the UK market from the Channel Islands.  Although not an unexpected move, it was nevertheless a considerable blow to the Islands, where the fulfilment industry has become a major source of employment and revenue for the Islands' coffers.  With unemployment already on the rise, the potential loss of a significant number of jobs was a serious problem, and the Islands have come out fighting by announcing that they intend to challenge the move.

The reason for the litigation appears to be the perceived unfairness caused by the fact that the UK Treasury will continue to apply the LVCR to commercial supplies from all non-EU jurisdictions except the Channel Islands. Jersey and Guernsey believe that in so doing, the United Kingdom has infringed European law. Within the Islands there are very mixed views on whether taking the UK government on in this way is a wise move or not.  There is concern in some quarters that even if the Islands do win, the likely reponse of the UK Treasury would be to remove the LVCR regime altogether, rather than singling out the Channel Islands for special treatment, which would represent something of a Pyhrric victory for the Islands and leave the Islands to foot a potentially expensive legal bill for little financial game.  However, the politicians in the Islands doubtless felt that they could not sit back and let the UK Treasury take such action unchallenged.

The issue raises a perennial problem for small international financial centres, in that whenever legitimate tax structures are identified which become a real success, they represent a high profile thorn in the side of the larger jurisdictions who then feel compelled to respond by legislating to prevent the structures from being used in the future.  Success itself brings problems in its wake.  Similar attempts have been made in the past to close down other tax saving opportunities, such as stamp duty saving schemes.  These latest developments should therefore come as no surprise to any observer of the international finance centres.