Thursday, 10 November 2011

Cheap CD tax loophole to close

Reports that the Treasury is to close the loophole that some online retailers have exploited in order to import CDs into the UK without having to pay VAT have been greeted with cheers from some quarters of the music industry this week. But I can't help feel that it's not something to feel that positive about.

Mail order businesses (like Play.com, CD-Wow, The Hut, etc) who can afford to setup in the Channel Islands have been able to circumvent the requirement to pay Low Value Consignment Relief (LVCR) on items that used to cost under £18 will, as of April 1st 2012, no longer be able to undercut businesses based on the mainland.  Apparently, this costs the UK £140m a year in lost tax and receipts.

Over the years many current high-street stores have established bases in the Channel Islands, allowing them to ship their goods to there for repackaging purposes in order to escape paying the tax. Indeed, even HMV does this, allowing them to undercut the process in their own high street stores, many of which are under threat due to the supposed slowing demand for expensive physical products in an era of free music via piracy or legal streaming services like Spotify, We7 or Napster.


There have been active campaigns to cut out the VAT-free loophole by groups like the Retailers Against Tax Abuse Scheme. Their spokesperson, Richard Allen has claimed
"This round tripping mail order industry, whilst popular with consumers, has destroyed or damaged scores of viable job-creating businesses on the UK mainland ... The removal of this major market distortion should be welcomed by all UK businesses that wish to trade online"
And here is the rub - I fail to see how beneficial it is to render the cost of CDs to a sum 20% greater than that which can be currently paid? It certainly means that customers might buy less music in a given period if there are additional pressures on their purse strings. This would have a knock-on effect for some artists and labels in that more tax equals less purchases and therefore less money finding its way up the royalty chain.

I understand the argument about taxes going back into the Treasury coffers - I'm assuming their economic analysis has predicted the fall in total sales of physical units. I don't see how Allan's argument will hold up though. Businesses that want to sell CDs online will still have to charge the extra task to the consumer, who will in all likelihood spend less. Even if Tesco has to pay tax on their goods they will have the economic klout available to undercut independent music stores via cross-subsidising.

In the mean time, quite a few employees in the Channel Islands will be made unemployed.