THE UK last week did nothing less than declare economic warfare on the Channel Islands.

How else can you describe a move that could cause more than 650 job losses, cost more than £6m. in direct taxes and more in indirect consequences?

In doing so, the coalition government clearly signalled that it has little political sympathy for a jurisdiction that has for the most part enjoyed a favourable relationship going back centuries with the UK.

The consequences of abolishing a tax relief that meant goods under £15 shipped from the Channel Islands could enter the UK VAT free are likely to be widespread – and unlikely to benefit those the move has been designed to help.

Much has been made by HM Treasury of the economic benefits it expects by targeting the islands – it anticipates £100m. extra in tax receipts.

And in an apparent sop to Business Secretary Vince Cable, it believes the move will help small and medium sized businesses in the UK.

Both arguments are flawed.

A vision of the likes of HMV relocating back to the UK while small independent record shops spring up in every corner of England’s green and pleasant land will not become reality.

Independents were primarily killed off by a combination of the supermarkets’ massive buying power and downloads – both legal and illegal.

Or they simply were not good enough – those that provide the best service survive.

The large internet operators, in an ideal world for Guernsey, will stay and absorb the extra costs but the most likely scenario is that once the Christmas rush has gone, so will they, off to the clean air of Switzerland or maybe around the globe to Hong Kong.

The UK’s move was, as government, business and, legal advisors have pointed out, discriminatory.

Far from creating a level playing field, it has maintained the VAT advantage for anyone shipping from outside of the EU except the Channel Islands.

Business being business, it will simply relocate to these areas – and for those saying that it will not happen because of the post times, think again – it is a matter of just hours extra, according to Swiss experts.

Besides, online consumers are largely price, not time, conscious.

The UK’s decision was born out of frustration over cheap CDs and DVDs, but it is one that has caused collateral damage to indigenous business including flowers and to those that manufacture on-island such as the card makers.

In Guernsey alone, there are more than 650 jobs on the line as a result of being singled out by the UK.

Unemployment is currently just a quarter of that.

There are few signs of capacity in the job market to absorb these often lower skilled workers, for all the optimistic talk of upskilling those affected.

Some 100 or so are on short-term licences, so might be expected to leave.

Guernsey has no fighting fund like Jersey has to act as an economic stimulus.

It is already struggling with trying to eliminate a budget deficit at the same time as the global economy is stuttering so badly.

No commentator has yet pinpointed what the next big employer for the island could be – dreams of a green future based around tidal power are some years off.

Should the fulfilment sector flee, the knock-on consequences for the economy cannot be understated.

The States will be paying out more in benefits, the price of everyday goods will rise as freight companies look to fill a hole left in their pockets as containers go back to England empty, the price of ferry tickets could go up and high levels of unemployment could lead to social and health problems. Guernsey’s domestic post service could be decimated, leading to further job losses and fewer deliveries.

The island to some extent reaped what it sowed by not taking strong action when the fulfilment sector grew out of proportion from 2005 and became a political football, although Jersey’s actions by introducing a control of undertakings law was arguably not as decisive as it might claim given the quantities of CDs and DVDs being exported.

Both islands were left exposed by being too reliant on a VAT relief which the UK to a large extent controlled the value of – ultimately, it is a European ruling which member states enforce at a level they choose between 10 and 20 euros.

How well the move has played out with the UK electorate appears debatable.

While campaigners and self-interest groups rejoiced and swamped message boards, millions of consumers could end up counting the cost and they know it.

The top-rated online comments on the Daily Mail news story covering this held a common theme that it will cost the man in the street more and that instead the government should be concentrating on large-scale tax avoiders and banks.

The Channel Islands will now launch some form of legal challenge, either government- or private sector-led.

For both island’s States, it is a difficult diplomatic path to cross.

Jersey has in recent times been much more aggressive in its dealings with the UK, for example its stance over the reciprocal health agreement and zero-10. It has not necessarily made friends, but has won some victories.

The long-term consequences of being too aggressive, though, could be even more dire – what if the attention turned back to the islands’ taxation regimes instead?

What the LVCR move showed is if that if anything is in the UK’s interests, it will act with little thought for the islands.

The whole saga has put fresh impetus into the arguments for the islands seeking greater independence so they can take more control of their own destiny.

Guernsey had argued against the LVCR move and, if it were to happen, for there to be a longer lead-in time, but all that fell on deaf ears.

And the way it was announced – campaigners had sight of the press release and timing before the islands did – was further evidence of a breakdown in the ‘special’ relationship.

The islands were treated with nothing less than contempt, in much the same way as they were during the politicising that led to zero-10.

Everyone will watch, as time goes on, whether HM Treasury’s sums add up.

But now it is time for Guernsey to deal with the miserable short-term consequences of what has happened while looking to re-imagine its relationship with the UK and seek that economic diversity based on solid foundations that it so far has failed to deliver.

Some of this could be about looking to develop markets in Europe, which is by far a larger economy than the UK.