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Small businesses and stores in the High Street are losing billions of pounds annually, thanks to a contentious tax loophole, which allows companies who send goods with a value of less than £18 from a base in the Channel Islands to avoid payment of Value Added Tax. This is due to Low Value Consignment Relief, which was initially introduced to reduce the cost of VAT on small items for member states, while reducing the cost of the collection of the extra VAT.

Since the introduction of LVCR, the number of online sales has increased as more businesses have set up a base in the Channel Islands to take advantage of this tax loophole. As a result, the cost of implementing LVCR has increased from £85 million to £130 million a year, over the last five years. The government has now reduced the LVCR from £18 to £15, which will come into effect on 1st November 2011.

As the tax loophole allowed businesses to undercut their competitors by as much as 20 percent, High street retailers and small businesses were at an unfair advantage. As the loophole could also be deflecting sales from the High street worth up to £600 million annually, the chancellor has committed to stopping the scheme from being abused, with a number of experts believing that the scheme will end completely.

The group RAVS (Retailers Against VAT Avoidance Schemes) filed a complaint, as the UK wasn’t taking action to stop abuse of the scheme. The complaint was upheld by the European Commission. According to Phil McCabe from the Forum of Private Business, LVCR abuse has been contentious for a number of years. He said:

“The exploitation of LVCR through the Channel Islands is both a tax abuse and highly anti-competitive.”

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