The people who campaigned for the end of so called ‘low value consignment relief’ for Channel Islands based online retailers yesterday said that the long-running VAT dodge played a key role in the collapse of HMV, despite the high street retailer ultimately basing its own mail-order business offshore.
As much previously reported, until last April any Jersey or Guernsey-based online seller of goods under £18 (later £15) could sell products to UK customers without charging VAT, giving them a 15-20% advantage over mainland retailers. Led by Play.com, online CD and DVD sellers in particular capitalised on the tax relief system.
This put traditional music retailers – even major players like HMV – at a disadvantage. Already saddled with higher overheads, there was no way high street stores could compete with the online sellers on price, and even if they launched their own mail-order services, they’d still be at a disadvantage unless they too went offshore. HMV eventually did just that, but it was too little too late – the traditional retailer having lost the burgeoning mail-order space to Amazon and Play.com by that point.
Anti-LVCR campaigners always maintained that HMV should have lobbied against the VAT dodgers rather than becoming one itself. Ultimately it was proven that rampant use of LVCR in the Channel Islands was against European tax law, and the loophole was closed last year, resulting in Play.com to shut up shop as a direct retailer.
Responding to HMV going into administration, Richard Allen of campaigning group RAVAS told CMU yesterday: “HMV said off the record that LVCR was damaging their business but it wasn’t confirmed publicly until Simon Fox did an interview in February 2012 with [games industry magazine] MCV in which he slammed ‘idiotic’ tax dodging. When HMV.com moved to Guernsey they initiated a price war with Play.com. For over five years HMV undercut their own shops in the interests of market share. It doesn’t take a genius to work out that VAT avoidance was a major factor in the demise of the bricks and mortar business”.
He continues: “Most record buyers equated HMV shops with ‘expensive’ due to the fact their shop prices included VAT. Whilst HMV clearly had problems as a result of a general decline in sales and the growth in internet retail, I think it’s fair to say that HMV is a casualty of tax abuse. Tax abuse has made online more attractive due to the huge disparity in pricing. This is an issue the industry doesn’t like to discuss because everyone is at it and, as we have seen, even those companies who are damaging their own retail base!”
Although LVCR abuse in the Channel Islands has been stopped by the UK government, some online players are now looking into ways to benefit from the same tax relief system in other locations, while, of course, the generally tax efficient strategies of certain online businesses have become bigger news of late. While VAT-dodging CD sellers on the Channel Islands are no longer an issue, traditional UK-based retailers are still disadvantaged by the clever use of tax rules by some online businesses able to base themselves in more tax efficient locations.