In the next few days the government is expected to make an announcement about the future of so called Low Value Consignment Relief in the Channel Islands. This is the tax relief system that means that mail-order companies based in the Channel Islands, selling products back to customers in the UK, don’t currently have to charge VAT on goods under £15, giving them a 20% advantage over mainland retailers. LVCR has been used by mail-order operators in various industries, but its use – and, some would say, abuse – has been most obvious in music and film, partly because CD and DVDs nearly always sell for under £15.
Play.com was one of the first to build a whole company from the competitive advantage the VAT loophole delivered, but soon numerous firms, including many of the traditional bigger UK retailers, were basing their mail-order operations in the middle of the English Channel, so they could undercut the opposition and still make a bigger profit.
Of course some of the savings were passed back to the consumer, making these services very popular with music fans. But, some have argued, in the long term the music industry, and music fans, not to mention the British tax payer, have all lost out, because many of the traditional specialist high street music retailers – already facing the challenge of declining CD sales – just haven’t been able to compete with bigger rivals which have a 15-20% advantage on price, sending many over the edge. Independent retailers have been worst hit, but the big guys of entertainment retail have suffered too, even those that ultimately relocated their own mail-order operations to the Channel Islands.
After years of government doing nothing, despite increased opposition to LVCR, it is thought the Coaliton is about to phase the tax relief system out. Ahead of that, we spoke to Richard Allen, an import and export specialist who ended up running an independent record company, and who was one of the first to begin prolifically campaigning against the VAT dodge, and the way it skewed the retail market to the disadvantage of already struggling independent music sellers. He was involved in the setting up of the RAVAS campaign and website, which was arguably crucial in forcing the government to act. CMU Business Editor Chris Cooke found out more.
CC: What’s your background – how did you become involved in the music business?
RA: I was a commercial executive, and spent ten years in import and export. So I was present at the HMRC [Revenue & Customs] presentations at Heathrow when the customs barriers came down in Europe.
My life in music started off as a hobby that subsequently got out of control. I ran a label called Delerium from 1991 and the biggest signing was a band called Porcupine Tree, who are a now a well respected internationally recognised serious rock outfit. I spent twelve years managing them and traveled all over the world with them, so have a pretty broad experience of the industry from almost every perspective.
I also developed a cult online mail-order business from 1991 to 2007 called The Freak Emporium, which went online in the mid 90s and was frequented by the likes of Julian Cope and Jello Biafra, and acknowledged by Stuart Maconie’s ‘Freak Zone’ as a cool place to pick up the best music you’ve never heard before.
So, unfortunately for the offshore fulfillment industry and the government, I had a thorough background in both VAT and music retail, so have been able to get into the real detail of the technical arguments in the LVCR debate with some confidence. When it comes to VAT or music retail you certainly can’t bullshit me with pseudo facts!
CC: When did you first become aware of mail-order CD sellers capitalising on the VAT loophole?
RA: One of my employees asked if he could have some mail-order packages sent to the office. A few days later an armful of jiffy bags turned up with bright orange Play.com stickers on them. This must have been around 2003. I asked him why he was buying so much stuff, and he said: “It’s great – no VAT! – stuff the government!”
I wasn’t so enthusiastic. I immediately realised the implication of a VAT-free competitor, and explained to my employee that such competition in our market could threaten his job. As with many of my LVCR predictions, I was later proven right. I stumbled across the mechanics of Play.com and LVCR at a direct mailing industry trade fair in London, where a company in the mysterious ‘offshore fulfilment’ section of the show explained to me exactly how it all worked
CC: For the uninitiated, can you explain why Channel Island retailers don’t have to pay VAT?
RA: Basically, the Channel Islands are outside the European Union for VAT purposes, and goods that enter the UK from outside the EU below £18 in value (just reduced to £15) are exempt from VAT. This is because of the action of an import relief that was designed to reduce archaic manual VAT collection costs before everyone used a computer and the internet.
Some bright spark worked out that if you deliberately sent stuff out of the UK to the Channel Islands and then sold it off a website, you could then mail items back into the UK and avoid the VAT. They also thought nobody would notice this was going on, and for many years nobody did. Until I came along!
CC: At what point do you think the use of LVCR actually started to have a detrimental affect on UK music retail?
RA: LVCR had a gradual insidious effect up to 2004, but generally the offshore retailers operating then only matched UK retail prices and gave free postage. They also really only sold more mainstream products. Play.com, and a few minor players, were ruling the roost up to that point, so it made more sense for them to keep the extra profit from the VAT advantage rather than translate it into lower CD prices.
However when HMV – albeit reluctantly – moved its mail-order to Guernsey they decided to commence in an aggressive pricing strategy to gain market share. HMV started offering all new releases at £8.99, delivered free, even if they were over £9.00 from the dealer. Play.com reacted and a price war began.
This hit the specialist retailers the hardest, as it forced prices down to within the VAT advantage even on products that people really didn’t mind paying a premium for. Once margins dropped to within 17.5%, all UK mainland retail was excluded from the game. It was then that everyone on the UK mainland obligated to pay VAT started going bust. We actually told the Treasury this would happen. It was very sad watching the prediction gradually unfold into reality.
CC: What other sectors were affected?
RA: The horticultural sector had been doing this for years, but nobody really knew about it. Vast amounts of plants grown in the UK travel in a big circle during the growing season to packing centres in the Channel Islands where they come back again by mail-order through companies like QVC, or those adverts for plants you see in the newspapers.
The infrastructure of this industry provided the base for the ink cartridge circular shipping that followed, as well as the contact lens fulfilment business. After that CDs and DVDs were just a logical extension since they are popular, relatively cheap, and fit neatly into a jiffy bag. This was followed by memory cards, phone spares, garden items, toys, computer games, cosmetics, perfumes, car spares. You name it, it was a gold rush!
CC: How did you get involved in the campaign to stop LVCR?
RA: When I first properly came across this issue in 2005 I could see where it was heading. However, having met totally ignorant indifference within the music industry, the only organisation I could find campaigning on the issue was the Forum Of Private Business. It just so happened that in autumn 2005 they were giving evidence to the All Party Parliamentary Shops Group, who were compiling a report called ‘High Street Britain 2015’. I gave evidence on LVCR abuse at the hearings, and then I was part of a delegation that met with HM Treasury in early 2006.
From there it really snowballed. I realised the ultimate consequences of doing nothing for both my business and UK music retail in general. Frankly it was do or die. I wanted to save my business and the industry I loved.
CC: Both the UK and Channel Island governments seemed to initially pay lip service to the campaign, but little more. Was it frustrating in the early days?
RA: Understandably the Channel Islands didn’t want any attention. They denied everything or tried to blame it on this company or that company. Tesco’s got all the flak at one point, but they had actually complained to HM Treasury in 2004 that if nothing was done they would have to go offshore as well. I think that because Tesco got lots of flak over their domination of the high street they were an easy target, but really they were not a major player.
The UK government were also covering it up during Labour’s watch because nobody had the political guts to tackle it. Those in charge thought they would be vilified for damaging consumers’ interests. That’s an issue that was constantly raised before the current financial crisis, but the truth is you won’t be consuming much if you just lost your job because an offshore VAT-free company destroyed the business you work for. The issue here is the damage to the economy and business. It was so short sighted.
CC: The campaign seems to have gained a lot of momentum recently, why do you think this is?
RA: The battle went through a number of phases. In the early days every possible political angle was pursued. I met countless ministers and politicians, many of whom couldn’t actually understand the technicalities of the problem, which was extremely disheartening. With the previously mentioned FPB, we had two early day motions and an adjournment debate in parliament. Later, as things got worse, I was involved with a judicial review that was funded by Fopp and Music Zone, but they both then went under, so it couldn’t be completed.
Then, in December 2007, my own business had to close as it became impossible to compete. I had even seen CDs I myself had released coming back into the UK VAT-free, undercutting my own mail-order service and the few remaining mainland outlets that survived. It was surreal.
By 2008 I was on my own, and out of a job, but having a bit of finance I managed to carry on, and it was then that we filed a complaint with the European Union, because we believed (and a respected tax QC had told us) the way LVCR was being used, and the UK government’s failure to stop it, breached EU rules. On that I worked with a great guy called Martin Smith, who had previously worked for the FPB, and who knew how to work with the EU. Together with Martin I made real progress, and with the help of Simon Bowers at the Guardian the issue was highlighted in the press, so that in 2009 I started making contact with independent traders affected by the impact of LVCR in other retail sectors.
Chris Holgate, an ink cartridge retailer, set up the RAVAS [Retailers Against VAT Avoidance Schemes] website and then it just snowballed, and before I knew it I was an expert in horticulture, cosmetics, memory cards and all the other products being sold VAT-free. Retailers who were affected were overjoyed to find a focus for this issue. It’s very lonely being gradually strangled to death by VAT!
In late 2010 it was clear the EU agreed that this [the use of LVCR by Channel Island etailers] was abusive, and that same year the current government began to make positive noises, helped by our EU complaint and, I believe, a genuine understanding of the issues. Lord Lucas, in particular, has been a real ally and a bringer of light.
Ultimately, those that live by the sword die by the sword, and in this case LVCR abuse grew because of the rise of the internet, and our campaign to end it also grew because of the rise of the internet.
CC: What do you say to people who argue that, as music fans got access to cheaper CDs, there was a good side to LVCR?
RA: I can’t deny that lower prices through LVCR are good, but at what real cost ? With all the independents wiped out you can’t find any specialist music retailers, most shops are gone and the market is dominated by corporate companies with bland price-focused websites based offshore. I can’t see how that can be good for the consumer or the music fan.
Everything is now based on price whilst it used to be based on knowledge and advice. Less choice can’t be good. It was diversity and choice that made British music so interesting. However, I really think that something good will come back if this LVCR situation is corrected, and the eccentric specialist retailer can trade again. That’s assuming some of the other online monopoly arrangements that have developed recently can also be dealt with… but that’s another issue!
CC: Why do you think that the big music companies, and big music retailers, who seemed to turn a blind eye to the rise of the VAT-free mail-order companies, didn’t lobby harder over this ten years ago?
RA: I have to say that the UK music industry trade bodies, with one exception, have been pretty much useless in dealing with what is probably the most damaging issue for music retail other than piracy and illegal downloads.
More recently I have had the opportunity to work with trade bodies in other sectors, such as health foods, and they have been much more pro-active in dealing with this problem. The Entertainment Retailers Association, or BARD as they were, who were probably best placed to lead the legal charge, couldn’t do anything because its membership was dominated by those with offshore interests. Even when I explained to them how LVCR activity was breaching European laws.
The one exception has been Alison Wenham and the Association Of Independent Music, who have done a fantastic job supporting RAVAS at the EU through [pan-European indies body] IMPALA.
Other than that the music trade bodies have been utterly impotent. I recall meeting with the BPI to try and get them interested in the damage LVCR was causing. They just dismissed it as “an issue for retail”, even though it was resulting in their members having to dish out huge discounts to UK retailers to allow them to compete with VAT-free competitors. Of course the market distortion ultimately caused prices to fall and the UK has the lowest CD prices in Europe as a result.
When that letter supporting [a by then struggling] HMV went into The Times earlier this year, from all the various major label big wigs, I didn’t know whether to laugh or cry. The best support they could have given HMV was to not supply offshore tax avoiders that were undercutting HMVs bricks and mortar business. Instead they merrily entered into TV advertising campaigns with them.
It’s hardly surprising, is it, that HMV is having a hard time, when you can walk into a store, find an album you want, then look it up on your phone and order it VAT-free, so for 20% less? As for the big music companies, they are far too slow and ponderous to be able to deal with an issue like this. If you have to justify everything to shareholders you have a major handicap, although if I was a shareholder in HMV I’d be asking some really awkward questions.
CC: We don’t know what the government is going to announce, but assuming LVCR is phased out, is it too little too late for British music retail?
RA: The damage was critical in 2008. They should have acted in 2005 or 2006 when the ‘High Street Britain 2015′ report recommended strong action on LVCR. Instead the silence on the issue was deafening. Hopefully, with a level playing field in VAT, we shall now see some green shoots.
Vinyl was very cheap in 2006, but the price seems to have gone up with no complaints. It shouldn’t all be about price anyhow. I like wine. I don’t buy the cheapest bottle I can find. I value it. The same should be true of music. We’ve seen the glory days, digital won’t go away, but hard formats have a way to go yet and nothing ever dies completely. You can still buy brand new phonograph cylinders.
CC: Do you think the online mail-order companies will find other ways of undercutting mainland retailers?
RA: I’m sure they will, but it’s up to the music industry to get their act together and help the government stop it, rather than join in on a ‘hand cart to hell’ like they have done with LVCR.
CC: It seems like fighting this campaign has involved a steep learning curve on the art of lobbying and the intricacies of the European tax system. What has surprised you most?
RA: Well, firstly the biggest surprise is that I got a result. I went in assuming all kinds of bizarre conspiracy theories, but realised that government is not always as clever or knowledgeable as people might assume and that many things happen by accident. Of course there are always some shady goings on, but that appears more to be people taking advantage of the situation when nobody is on watch. You can’t get anywhere in government if you don’t believe it’s possible.
I also had a great deal of help from people who agreed with my views. There are good people in government, as I said, Lord Lucas in particular has been very helpful, and a number of lawyers and other experts have given their time for free to correct what they regarded as an injustice.
When everyone is apathetic and believes that nothing can be done that’s when you have a problem. Don’t let party politics get in the way of common sense either. I really don’t care what the political party is as long as they make sensible decisions, and sensible decisions with regards to LVCR were sadly lacking for a very long time. I really hope the government makes the final sensible decision and closes this VAT avoidance arrangement down for good. I’ll happily pay 20% more to see UK mainland music retail flourish again.
Photo by Rebecca Maynes, courtesy of Classic Prog/Future Publishing
Sections: by Chris Cooke - Q&A R | Tags: Low Value Consignment Relief, RAVAS, Richard Allen
