The secret DVD tax hike

The tax loophole that allows sites like play.com and Amazon to sell DVDs and CDs at low prices is to be closed, as Robert Powell reports...

For several years without fail, in early to mid-December, an email would land in my inbox detailing the CDs and DVDs I was to receive for Christmas. All because my parents insisted on using my online shopping accounts.

Yes, my dear old mum seemed to lack a concern for the existence of a confirmation e-mail or, apparently, her son’s appetite for surprise.

Of course, this email also detailed the prices of my prospective presents. Which were, without fail, always bargains.

Why so? Well, because Mrs P exclusively shopped at play.com and Amazon.

But these online DVD and CD bargains may not be around for long, after the government tabled plans to close the tax loophole that allows companies based in the Channel Islands to sell cut-price goods.

VAT-free

Jersey-based online shops such as play.com and Amazon are able to offer such low prices on CDs, DVDs and video games because of a tax loophole known as Low Value Consignment Relief (LVCR).

LVCR allows goods under £18 to be sold from the Channel Islands to UK consumers VAT-free. This means that online stores based in Jersey or Guernsey can undercut mainland suppliers.

However the UK government is changing the tax rules so that from April 2012 this loophole will be shut.

The decision comes after criticism of the loophole which is said to put independent retailers at risk and cost the government as much as £140m in tax revenues every year.

Against EU law

The biggest losers from this change are obviously the online companies whose entire business model is based on this tax loophole. Indeed, officials from the area have said that the alteration could cost the islands thousands of jobs.

However in the last few days, Jo Huxtable: a tax partner at the accountants Deloitte suggested that the planned change could well be in breach of EU laws.

She said that the government could alter the level of LVCR, but not exclude certain areas or goods. Under the Treasury’s plans, goods from other non-EU jurisdictions would not be affected.

This suggests that the bailiwicks of Jersey and Guernsey may be able to challenge the proposed alteration.

But Channel Island business won’t be the only losers if this change goes ahead.

UK consumers

If LVCR is axed, the online price we all pay for CDs, DVDs, video games and other low value items such as USB drives, cosmetics and contact lenses, will rise. And that’s bad news for a country tentatively looking towards a financially tough Christmas.

But the good news is – even if this tax alteration does go ahead – it won’t come into force until April next year. So you can still get your cut-price CDs and DVDs from Channel Island suppliers for this festive season.

Festive tax

Despite LVCR still operating for the Channel Islands this Christmas, VAT and other levies could still leave you with a nasty festive tax bill if you’re not careful.

The HMRC has said that shoppers should be aware that they may face a charge if they order gifts from outside the EU. And this could turn an apparent bargain into a Christmas rip-off.

Any package valued at more than £15 and bought over the internet from outside the EU will face a £15 VAT charge. Customs duty may also apply if the goods are valued at over £135.

The rules change slightly for gifts – that is, a package sent from one individual to another without any money being exchange. Import VAT is charged on gifts sent from outside the EU if the package is valued at more than £40.

But if you are planning on either shipping packages in from overseas this Christmas, or sending packages out, there is one more issue to consider.

Last shipping dates

When ordering gifts in from abroad you should always check the estimated delivery time with the website. It may be lengthier than you think.

For sending gifts out, the last recommended posting date has passed for international surface mail (the cheaper shipping option) to destinations outside of Western Europe. (Western Europe has a last recommended posting date of 22 November.)

However you can still send packages by airmail. Here are the final recommended posting dates for this service:

Source: Royal Mail

Inside the UK, you’ll need to post any standard parcels by 14 December, second class post by 17 December and first class by 20 December. We’ll have a full breakdown of the last posting dates later in the month.

A fair change?

Is this Channel Island tax alteration a fair change?

Have your say using the comment box below.

More: Landlords could be hit by covert tax hikes | VAT hits the poor hardest | Wine drinkers set to pay more tax