Memory and consumables VARs on VAT loophole tenterhooks

One reseller admits he may quit IT market altogether if Low Value Consignment Relief loophole is not abolished on 1 April

The outcome of a judicial review that kicks off today could make or break hundreds of UK-based memory, consumables and peripherals resellers struggling to compete on price with offshore rivals.

Last November, the government announced it will close a loophole in Channel Islands VAT practices that has allowed firms based in Jersey and Guernsey to undercut mainland suppliers on low-value products by 20 per cent.

However, the decision, which is set to come into force on 1 April, is now the subject of a judicial review initiated by the governments of Jersey and Guernsey.

If overturned, it could have dire consequences for resellers of low-value IT products that have struggled to compete as competitors moved operations to the British Crown dependency in their droves.

One memory reseller told ChannelWeb it will cease the sale of IT goods altogether if the loophole is not abolished.

Abuse of the Low Value Consignment Relief (LVCR) loophole involves a process known as circular shipping, whereby goods are exported to the Channel Islands in order to re-import them to UK customers VAT-free. Many big etailers, including Amazon, HMV and Play, as well as a number of mid-sized printer, memory and peripherals specialists have moved there in recent years – some reluctantly – to exploit this.

Entrepreneur Kevin Bordley said he has sold just four memory cards at a profit of 17 pence since launching his online venture, www.creativeupgrades.co.uk, from his bedroom three years ago.

The focus of his business swiftly moved into healthcare after it became clear he could not compete on price with Channel Islands-based competitors. Bordley said he will turn his back on IT altogether if the government's ruling is overturned.

"I spent £9,000 on marketing the website but it is plastered with healthcare products at the moment," he said. "There is a huge opening if LVCR is abolished on 1 April and I will certainly look to get Creative Upgrades back to what it used to be, which is selling IT at a good price."

Chris Holgate of printer cartridge dealer Refresh eCommerce said LVCR has had a cataclysmic impact on his industry.

He estimated that the vast majority of printer cartridges are now shipped from the Channel Islands.

"Almost all of the major players have moved offshore. On products that don't make a huge margin, you can't compete," he said. "It's quite soul-destroying as we have had some customers thinking we are ripping them off."

Holgate said he will consider moving operations to the Channel Islands himself if the status quo is upheld.

"I was born and educated in England, and it seems sick to abuse the tax system at the first opportunity. But although it is good to have principles, you still have to eat, and I would go reluctantly," he said.

Both Bordley and Holgate are involved with pressure group Retailers Against VAT Abuse Schemes (RAVAS), which has campaigned against LVCR for years alongside the Forum of Private Business (FPB).

RAVAS representative Richard Allen said: "The long-term and blatant abuse has destroyed many UK businesses which, other than for the lack of a 20 per cent trading advantage, would have been viable healthy operations giving people jobs and generating tax revenue in the UK."

Alex Jackman, senior policy adviser for the FPB, said: "Hopefully, the Channel Islands' case will be thrown out of court and we will see a level playing field soon."

The governments of Jersey and Guernsey claim that closing the LVCR loophole on 1 April 2012 would be discriminatory and illegal.