Budget2011: DVD VAT loophole remains, warn advisers

MUCH ANTICIPATION had been built up in recent weeks around the closing of the press-nicknamed "cheap DVDs loophole" in today's Budget - but hopes were dashed as it effectively remains in place.

The so-called "loophole" - Low Value Consignment Relief (LVCR) to give it its proper name - allows small-value items such as DVDs, CDs and optical goods such as contact lenses, to be imported into the UK from outside the EU without customs duties or VAT being applied.

Providing the value of the item is less than £18, which is the current threshold for LVCR, and is not part of a large consignment of items being sold (i.e. B2C rather than B2B sales), the item is not subject to VAT or other duties.

This has allowed some retailers - press reports have named Amazon, Tesco, Asda and HMV as examples - to take advantage of the relief by dispatching goods out of warehouses based in Guernsey and Jersey, which smaller bricks-and-mortar retailers say undercuts their business and gives the larger retailers an unfair advantage. Treasury sources say the amount of VAT lost this way in 2010 was £130m.

During his Budget speech the chancellor announced that rather than abolishing the relief, as widely expected, the threshold would be reduced from £18 to £15 from November 2011. However, this is only expected to bring in an extra £5m in the 2011/12 financial year, and £10m thereafter, peaking at £15m in 2015/16. Is the measure even worth doing? Glancing at the expected revenue increases, it would seem not.

However, there might be other reasons for the small reduction in the threshold rather than an outright abolition. Alan Sinyor, head of VAT at Berwin Leighton Paisner, said: "The LVCR relief is basically a simplification; if you were to get rid of it completely, you will have to charge VAT on every single small item sold - which would be a huge administrative burden."

Sinyor argues the chancellor's measure is a trade-off between keeping the relief and placating the bricks-and-mortar retailers, rather than a serious way of raising revenue to plug the deficit.

Steve Hodgetts, VAT partner at Baker Tilly, agrees with Sinyor's argument, saying: "The measure is more a PR proposal in tackling avoidance: a lot of UK businesses feel they're competitively disadvantaged, and that is the case for those who are too small to operate a scheme to take advantage of LVCR. But I think the government can't abolish it straight away, even though many reports suggested they would; they would have to go to the EU first and make sure they don't infringe EU legislation."

Of course, UK tax law is increasingly subject to EU legislation and that would seem a sensible move, but a £3 reduction is still probably not enough to make a difference to stop smaller retailers complaining. Daniel Lyons, indirect tax partner at Deloitte, says the reduction is far less than permitted under EU law, which currently allows the exemption to be reduced to approximately £9 - which, of course, would make a far greater impact, especially given that many DVDs and CDs are less than £15.

"The impact of these changes will be more limited than had been widely expected," Lyons said. "It will still be possible for many items to be imported without customs duties or VAT being applied and there will be minimal impact to those companies currently utilizing LVCR. However, Budget 2011 publications suggest that discussions with the European Commission are ongoing."