High Court rejects Channel Islands’ challenge to proposed Budget measure closing VAT loophole

16 Mar 2012

Yesterday, the Administrative Court dismissed a challenge to the lawfulness, under EU law, of the Government’s decision to stop imports of goods by mail order from the States of Jersey and Guernsey (“the States”) into the UK from being VAT free. The Chancellor will table resolutions intended to achieve this aim on 21 March 2010 (the date upon which the Budget is announced), and it is anticipated that the resolutions will pass into law on 26 March 2012.

The States are not part of the EU for the purposes of the harmonised VAT union. Ordinarily, therefore, imports from the States into the UK should be subject to VAT upon entry.

For the purposes of administrative simplification, however, Article 23 of Directive 2009/132 provides that imports which have a low or negligible value can be exempt from VAT, which is referred to as Low Value Consignment Relief (“LVCR”). The threshold currently set by the UK Government is £15. Critically, under Article 23 the Member States retain the power to exclude mail order goods from the ambit of this exemption.

LVCR gives a plain competitive advantage to traders importing goods into the UK from or via the States, and consequently a mass fulfilment industry has developed. This industry covers a wide range of products, including CDs/DVDs, plants, video games, household appliances, stationery and health supplements. The industry’s estimated value is £500 million a year.

The States commenced an urgent judicial review against the decision on 20 December 2011. During the expedited trial which started on 13 March 2012, the States argued inter alia that: (a) Article 23 only granted the EU Member States an “all or nothing” or binary power i.e. they could only remove LVCR from all non-EU countries or let all such countries enjoy the exemption; and (b) the decision breached the principles of equal treatment and fiscal neutrality because the UK would be treating the States’ imports differently from imports coming from other non-EU countries such as Taiwan or Switzerland.

The association called Retailers Against VAT Avoidance Schemes (“RAVAS”) was granted permission to submit evidence about and make written submissions in support of the Government. RAVAS submitted evidence showing that traders operating through the States are engaging in abusive practices, and that the LVCR is having a hugely detrimental impact on UK-based retailers.

The Court rejected the States’ application for judicial review because Article 23 of the Directive granted the Member States an unfettered discretion to exclude mail order goods from LVCR. Further, as the States are not members of the EU the principles of fiscal neutrality and equal treatment do not apply to them. The Court’s judgment means that the Government is free to press ahead with tabling the resolutions removing the exemption from the States on Budget day.

The Administrative Court granted the States permission to appeal on the basis that the case raised important issues, and, accordingly, it was appropriate for a higher court to hear the case.

The case has been widely reported in the press.

Valentina Sloane and Julianne Stevenson represented RAVAS.