How a little known tax loophole started the High Street decline yet hardly anybody was aware of it.

The killer tax loophole

The damage LVCR did resulted in thousands of job losses in independent shops.This article explains its impact on record shops

Nothing contributed more to the destruction of record shops in the UK than an EU tax exemption originally intended to save money. This loophole became known as the silent killer of record shops. Low Value Consignment Relief (LVCR) is an exemption from VAT on goods below a certain value threshold imported into the European Union. At the highest point in its history, this value was set at £18 which covered pretty much every CD and DVD.  The purpose of the exemption was to save money by avoiding the complicated and costly process of collecting tax on “low value” packages. In practice, it was used by the Channel Islands mail order industry (which was outside the EU) to avoid paying VAT and, instead of saving money, this completely legal loophole cost the UK well over one billion pounds over 10 years.

This is how it worked:

A customer would search the internet to find the cheapest price to purchase a CD. As a Channel Islands-based internet retailer did not have to charge VAT on items under £18, their advertised products would always be cheaper than those of any retailer based in the UK who did have to charge VAT. More often than not, this price advantage ensured that the Channel Islands-based retailers obtained a UK customer’s order at the expense of a UK record shop or mail order company.

The Channel Islands-based internet retailer would order the CD from the UK record company which would ship the CD out to the Channel Islands. The CD would then be posted back in to the UK to the customer in a jiffy bag. No VAT was due because of LVCR being applied.

Can you imagine the feeling of despair throughout UK record shops as potential customers would come in to the shop and comment that the title they were interested in purchasing was cheaper online?

It was not long before this practice started having a huge impact on high street record shops and UK-based internet sellers alike, all of whom found themselves trading at a 17.5% (and later 20%) disadvantage. As virtually every CD in the UK retailed at a price below £18, this tax break proved to be devastating for the UK music retail trade. The UK government’s failure to tackle the issue resulted in hundreds of record shop closures.

If you ever bought multiple CDs via a Channel Islands internet retailer, did you ever wonder why they were dispatched to you in separate jiffy bags? That was to keep the price below £18 and therefore avoid paying VAT. If multiple CDs were dispatched in the same jiffy bag the value would likely be above £18 ensuring the retailer would be liable for VAT.

LVCR should have been removed from Channel Islands mail order goods as soon as the Government became aware that it was being used to undermine UK high street retail. Unfortunately, HMRC and the UK Government made it clear that they had no plans to end the Channel Islands’ use of LVCR. Due to the rapid growth of a company called Play.com (the first retailer to use the LVCR exemption to sell CDs) by the end of 2004 many UK companies were soon setting up operations in the Channel Islands to take advantage of the loophole and remain competitive, including the UKs biggest music retailer HMV. "We resisted that for as long as we could,” a spokesman for HMV told the BBC in 2005. “But we realised that if we were to try to compete on the same level playing field then we would have to try to get the benefit and that advantage as well.” 

In 2007, a mail order trader called Richard Allen raised a complaint with the European Commission regarding the UK’s allowance of LVCR to The Channel Islands mail order industry. Richard had been forced to close his successful online mail order business Delerium Mail Order due to the abuse of LVCR by Channel Island based traders and the huge market distortion it had created. 

He wasn’t prepared to give up however. By 2009, Richard had formed a campaign group called Retailers Against VAT Avoidance Schemes (RAVAS) that successfully brought together everyone suffering from the onslaught of Channel Islands VAT free mail order - not only music retailers but also traders involved in horticulture, cosmetics, health supplements, electronics and computer games. Richard’s campaigning obtained large amounts of UK press coverage.

Initially the businesses who had set up operations in the Channel Islands and the UK Government claimed that the LVCR trade was not an abuse of VAT legislation. However, the European Commission agreed with Richard that the Channel Islands’ LVCR trade was an abusive VAT avoidance scheme and threatened HM Revenue & Customs with legal action if they did not close it down. HMRC were forced to take action, and on November 9, 2011 announced the removal of LVCR from Channel Island mail order goods because “in recent years it has been used on an increasingly large scale to sell low value goods to UK customers VAT-free, a purpose for which it was never intended”.

In March 2011 George Osborne became the first UK Chancellor to mention record shops in a National Budget when to cheers of cross party support he stated to Parliament “We are going to tackle the exploitation of low value consignment relief that has left our high-street music stores fighting a losing battle with warehouses in the Channel Islands.”

Even so, the Channel Islands in a desperate attempt to hang on to their tax advantage tried to block the new LVCR legislation in the UK Courts. Richard then had to mobilise RAVAS members and raise £20,000 in two weeks to intervene in the court hearing and assist the UK Government. Everyone contributed money from the smallest record shop to large distributors and in March 2012 the defeat of the Channel Islands in the High Court established a landmark EU legal ruling that allowed LVCR to be removed from Channel Islands mail order goods. On April 1, 2012, the VAT loophole was finally abolished and the next day prices on the internet for CDs and DVDs increased by around 20%.

So why had virtually nobody outside the world of record shops been aware of the history of this loophole and why was there no publicity to celebrate its demise?

The blame lies with the humble Cornish pasty. In the same budget, George Osborne, not only became the first chancellor to mention record shops in a budget speech, but the first to mention pasties. He announced that VAT would be charged on hot takeaway food adding 20% to the cost of sausage rolls, pasties and other such savories. This was to stop supermarkets and some high street bakers undercutting chip shops and other hot food outlets who already had to charge VAT. 

The Pasty Tax, as it became known, was manna from heaven for the tabloid press who jumped on the story ignoring the bigger issue of the end of the LVCR tax loophole. Politicians lined up to be filmed eating pasties. George Osborne could not remember when he last ate a pasty and David Cameron said how much he enjoyed a pasty at an outlet in Leeds Station (even though it was argued in the media that no such pasty shop existed).  While the Government was accused of taxing the common man for pasties and sausage rolls, the end of the Channel Islands mail order tax abuse passed by unnoticed. The internet retailers whose VAT-free sales had been destroying UK record shops got off scot free as what became known as “pastygate” rumbled on. The closure of the loophole that had forced the closure of so many record shops passed by with hardly anybody picking up on it.

Despite this, within a year of the removal of LVCR from Channel Islands mail order goods all major music retailers based in the Islands had ceased their operations. By 2013, Play.com retail was no more, and the company sadly laid off 147 staff in Jersey. It is estimated that at its peak the use of Channel Islands LVCR cost the UK £165 million pounds a year in lost VAT on CDs and DVDs alone. During its existence the Channel Islands LVCR trade was the largest factor in the closure of more than 1,000 record shops.

Independent shops should have launched their own campaign of awareness and informed the public how the internet retailers were taking advantage of this legal tax loophole. It was in their interests to point out that, traders were indirectly depriving hospitals and schools of investment. In the end one person was determined to close the abusive trade. In so doing he saved untold millions in tax, along with many independent record shops.

Over its lifetime, the use of LVCR cost the UK at least a billion pounds in lost tax and even more in terms of UK job losses, benefit payments and lost national income. For the money he has saved the country and the benefit he has given to UK business, I believe Richard Allen should be in next year’s honours list.

The books of Graham Jones are available in record shops or online. The latest book The Vinyl Revival and the Shops that Made it Happen has been turned in to a film. It has just been released on DVD and is available in record shops or online. Distributed by Proper Music.

Each week I record The Vinyl Revival Record Shop Podcast. It contains lots of funny tales from the crazy world of record retailing. It is also available on Spotify.

Twitter: @Revival_Vinyl

My blog has over 100 features on record shops and vinyl.

grahamjonesvinylrevival.blogspot.com

For film screenings and talks contact Graham. 

As the person who has visited more record shops than any other human, I often get asked my advice on buying turntables. I always say do not purchase a budget model. What is the point of buying one that costs the price of a few albums? The sound will not do the recordings justice. For a long time, I have recommended Rega Turntables as they are superb quality at great prices. They got more brownie points for sponsoring 'Record Store Day' and manufacturing limited editions just for record shops.