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Barclay twins join tax-haven CD retailers

Household names exploit Channel Islands loophole

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• Simon Bowers
• The Observer, Sunday 7 June 2009
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The billionaire Barclay brothers are poised to join a fast-growing band of retailers exploiting a controversial Channel Islands tax loophole in order to sell VAT-free CDs, DVDs and video games over the internet, undercutting prices in struggling independent high street stores and depriving the Treasury of millions of pounds in lost revenues.

The planned move comes after Treasury minister Stephen Timms privately assured struggling high street businesses unable to compete with offshore websites offering VAT free prices, that there are "only two major exporters in the audio visual market in the Channel Islands".

In fact, contrary to Timms' claim, all household-name CD and DVD retailers - including HMV, Amazon, Play, Tesco, Asda, Argos and WH Smith - run substantial "free home delivery" internet export operations from Jersey or Guernsey in order to exploit the tax advantage. An Observer investigation has found a Scottish government quango is even a shareholder in one of the most established VAT loophole companies.

According to market research firm TNS, 28% of DVDs purchased by customers in Great Britain are bought on the internet. The figures for CDs and games are 23% and 25% respectively.

The craze for buying on the web has contributed to the demise of many high street stores. Among the established names to have failed in recent years are Fopp, Silver Screen, Our Price, MVC, Music Zone, Tower Records, Zavvi and Woolworths. The Channel Islands trade is also estimated to be costing the Treasury hundreds of millions a year in lost VAT revenues.

Shop Direct, the Barclay brothers' mail order empire, which includes Littlewoods, Great Universal and Kays, will this month - possibly this week - start offering VAT-free products on its Woolworths website, acquired from administrators earlier this year after the high street store chain went bust. Sir David and Sir Frederick, proprietors of the Telegraph newspaper titles, are Channel Islands residents for tax purposes.

The Woolworths online relaunch echoes a similar move by specialist tax-avoidance retailer The Hut to resurrect an internet incarnation of Zavvi after the high street chain of the same name also failed. Most of Woolworths CDs and DVDs and many console games will be shipped out to the Channel Islands and back again, in order to qualify as "low-value consignments" and therefore be VAT exempt under a 1983 EU directive.

In a recent letter, seen by the Observer, Timms claimed Channel Islands officials had imposed a licensing regime on Jersey exporters, purging the island of those abusing the loophole. Guernsey authorities too, he said, "do not encourage new UK companies in the CD/DVD market to set up and operate from there". In fact, those retailers who left the Channel Islands in 2006 - the most high-profile of which was Tesco - have all quietly returned, many using agent companies.

The Timms letter goes on to claim: "There are now only two major exporters in the audio visual market in the Channel Islands, and one of these is a company indigenous to Jersey, over which the UK government has no jurisdiction." But an Observer investigation has found all but one of the companies involved in the VAT dodge, are controlled by UK-registered parent businesses. Maidenhead-based HMV Group and Swindon-based WH Smith, both stock exchange-listed, push much of their online sales through subsidiaries HMV Guernsey and WH Smith Jersey.

Amazon has an arrangement with Indigo Starfish, a Jersey company owned by Glasgow-registered parent Indigo Lighthouse, while Tesco, Asda, Argos and WH Smith have struck outsourcing deals with Cheshire-based The Hut, which operates through Jersey and Guernsey subsidiaries.

The only genuinely Channel Islands-owned company using the VAT loophole is Play.com, founded by Jersey islanders Richard Goulding and Simon Perree.

Scottish Enterprise, a government quango, became a shareholder in Indigo Lighthouse after investing in 2004. Asked about the investment it said: "We are pleased with Indigo Lighthouse's contribution to the Scottish economy."

The Treasury has previously suggested the cost of collecting VAT on personal imports below £18 in value would be greater than the boost to VAT revenue. But a senior tax partner at one "big four" accountancy firm, who asked not to be named, said this argument was increasingly untenable. "It [the EU directive] is being used in a way that was not envisaged and the Treasury really needs to take another look," he said.