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Wednesday, 7 December 2011

Loss of LVCR is no threat to business

Shipments will no longer be sent from Jersey,
but the profits will keep on coming.
How will the government react?
Finally the long awaited details of how low value consignment relief have been revealed and I suspected it is a minor change which will only affect those businesses which have sprung up specifically to exploit the regulations.

Normal businesses such as my own do not file VAT returns when shipping goods to the EU, the VAT is payable by the recipient on receipt. Just as you or I pay the GST on items imported to Jersey, they are not paid by the company that supplies the goods.

Where fulfilment businesses differ is that they voluntarily file VAT returns with Her Majesty's Revenue and Customs in the UK and pay the VAT on items over the £15 value (formerly £18). The change is that now these companies will have to pay the full VAT on all items irrespective of the value of the goods.

So what is the obvious next development for these businesses?

The Company will be divided into two. The cost part of the business is the fulfilment and this will be spun off as a subsidiary.

The cost of labour and commercial property in Jersey is artificially inflated by government programs, most notably the rental subsidy offered by income support which drives up both the rental value of property and the cost of living in Jersey meaning that wages must be higher than in the UK. Therefore the businesses will simply move this part of the operation to the UK. The UK government is offering grants for businesses to relocate for example to Wales which already has a large fulfilment operation. The company will thus make a large saving in this area.

The orders and the payments for those orders will still be collected in Jersey, but the goods will be stored in the warehouses in the UK. The Jersey company will have to pay input VAT on the orders. The customer will place their order with the Jersey Company, who will pass the address for delivery to the UK subsidiary. The UK subsidiary will package the goods and ship them out for a fixed fee (plus perhaps a storage charge for the goods). This process is already used by Amazon fulfilment which many sellers use to ship their goods.

The profit will not be affected as the saving in costs of labour and rents will be offset by the increased VAT paid. The profits will still accumulate in Jersey where they will pay 0% tax until the company pays out a dividend.

It is only the government which may be affected as if the 1,700 jobs go in the Channel Islands, the income tax and social security will no longer be collected.

The stark choice for the government is to cut back on spending to account for this or to try to raise taxes. I know which I want them to do, but I suspect they will simply raise GST which is of course the more beneficial in the long run as is will cause harm to the Jersey economy cutting their ability to raise revenue further and in the end forcing even deeper cuts in expenditure.

I just hope they are not stupid enough to issue a legal challenge against the UK when it serves no one, certainly not the best interests of the people of Jersey.