Channel Islands' LVCR litigation against UK Treasury commences

Yesterday saw the start of the Channel Islands’ High Court legal battle to prevent HM Treasury from singling out the Islands as being unable to use a VAT exemption for low value consignments, whilst permitting all other non-EU states to use the exemption.  There is a lot at stake - the Islands stand to lose more than 2,000 jobs in the fulfilment sector if they fail to win the case. 


The law suit has polarised opinion both inside and outside of the Channel Islands. On the one hand there are lobbyists in the UK who argue that the LVCR is a loophole which loses the UK taxman millions of pounds and is killing Britain's high street stores, as a whole range of retailers have chosen to sell their low value goods through online businesses based in Jersey and Guernsey, rather than through real stores in the UK.  They argue that it is not only economically sensible, but morally right to close down a "loophole" which has been ruthlessly exploited by the offshore centres at great cost to the UK tax-man.

On the other hand, you have the representatives of the Channel Islands fulfilment industry, and the businesses who have set up shop there, who argue that LVCR is not a loophole at all, but was a pragmatic acknowledgement by the UK Treasury that it is economically not viable to process VAT claims on goods of less than £15.  Indeed, many European countries have the same arrangements in place. They further argue that HM Treasury is entirely misguided in thinking that closing the LVCR to Jersey and Guernsey will lead to more revenue for HM Treasury and a resurgence of high street shops.  It is hard to fault the logic of this - the reason that online businesses are taking over from physical shops for items such as DVDs, books and music is simply that overheads of online businesses are lower, and they can reach a massively wider audience online and therefore buy in bulk, so business costs are lower.  It is a nonsense to think that the UK consumer will go back to high street shops if the Jersey and Guernsey fulfilment business is closed - they will simply buy their goods online from elsewhere, and the most obvious place would be from one of the other non-EU countries where the LVCR will remain in place (such as Switzerland).  So HM Treasury will have acquired no additional tax, and will have caused enormous damage to the Channel Islands' economies.


So although it may seem politically expedient to single out the Channel Islands and tap into the current tax-havens-are-responsible-for-all-the-world's-woes Zeitgeist, it is actually futile and damaging to do so.  Unless Danny Alexander has some Machiavellian masterplan to shut down online retail business altogether (impossible of course), he is never going to be able to get that revenue back into UK coffers unless he introduces some spectacular tax incentives for online businesses to set up in the UK (but, hang on a minute, wouldn't that make the UK one of those horrid tax havens?).  The only logical thing to do if he feels that the UK is losing too much to overseas online retailers would be to scrap the LVCR for all jurisdictions, but we know that the costs of administering the VAT would be prohibitively high and all it would succeed in doing is driving up prices for the beleaguered consumer in the UK.  The problem is that these are complex arguments that are not easy to communicate to the UK public.  So it's easier for Danny Alexander to give in to the political grandstanding and be seen to be taking decisive action against "tax havens".  Even if it's not only pointless, but damaging.


That being said, taking legal action against the UK government is still a bold move.  The political sentiment at the moment is very definitely hostile to "offshore" and even if the Channel Islands win the day today, then they run the risk of angering the UK government and suffering a backlash on other issues.


I will watch and wait with interest to see who wins the day in the High Court.  But I can't help thinking that it's likely to be the Swiss.