You can't help but feel sorry for Tony Blair sometimes. One minute he is exhorting British industry to seize the e-commerce opportunity, the next he and his Cabinet colleagues are running scared as it dawns on them just how much in tax revenues could be lost thanks to the digital economy.
The latest wheeze for IT firms hoping to prevent the taxman from digging his hand too deeply into profits is to set up in the Channel Islands.
Nothing new there. Jersey has long been a favourite tax haven for those who like the idea of a 5 per cent corporate rate compared with at least 20 per cent on the mainland.
While 5 per cent corporate tax is attractive, the problem until now has been that if Channel Island firms wanted to export their wares to mainland Britain, a hefty 17.5 per cent VAT was whacked onto the price. Take into account freight bills and the fact that few firms can exist entirely on the indigenous trade of the Channel Islands, and it has rendered impractical the economics of setting up in Jersey.
But online trading, or e-commerce, is changing all that. What has prompted the latest stampede to the Islands is the realisation that Web-based trading can bypass Britain's VAT laws. This is because Web transactions are subject to the VAT rates of the country where the purchase is made, and the origin of an online purchase is generally defined as where the server is based.
So, move your Web server to Jersey and customers can download software, music and digital images at prices lower than they would pay elsewhere.
Work - say, recompiling a bit of software - might be undertaken physically by a subcontractor on the UK mainland before being boomeranged to Jersey and then back again to a customer in Blighty. In the process, it sheds any VAT liability. Put another way, a London reseller could, under contract to his own Jersey Web company, provide a UK customer with both localised service and unbeatable prices in an online slight of hand that would do credit to any 'find-the-lady' card shark.
But corporate customers can reclaim the VAT element against their own VAT outputs, I hear you say. True, but there is plenty of business from kids wanting best-price games and non-VAT registered or zero-rated organisations which, given the chance, would happily dispense with the extra 17.5 per cent levy. For those targeting the cheap end of the market, another bonus is that even when items such as software games are sent snail mail to the UK, there is still no VAT if the posted value is less than #18.
It's easy to see why one Jersey consultancy, MicroNet, receives about 100 enquiries a week from Web traders interested in re-siting their servers.
Will Blair block this loophole? Probably, but only once international tax laws are harmonised. In the meantime, digital Del-boys are having a field day, their cherished anthem never more appropriate. All together now: 'No income tax, no VAT ...'
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