A CRACKDOWN on CD and DVD retailers exploiting the so-called VAT loophole is under way. Commerce and Employment yesterday agreed to ask the Office of Utility Regulation to investigate the effects on Guernsey’s economy if the exemption was modified or scrapped.

In an attempt to appease UK Government concerns, it will also look at the possibility of quotas on the number of CDs and DVDs that can be exported.

Under current VAT rules, businesses can export goods to the UK tax free as long as they do not exceed a maximum value of £18. That has led to HMV setting up a fulfilment centre in the island and Virgin Megastores is in the process of doing the same.

Successive UK Budgets have raised concerns about the damage it does to the economy.

‘They are considering modifying it or removing it. We are looking at the effects of that and whether there’s action we could take to encourage the British Government not to modify it,’ said minister Stuart Falla, right.

‘If we could, say, limit the volume of exports of CDs and DVDs to a fixed level that they couldn’t go beyond, that might be a process.’

He said the quota was something to be considered. ‘There was a comment made in the last Budget saying Jersey was being helpful, Guernsey wasn’t. We want to protect industries indigenous to us, like cut flowers, health supplements and the like.’

He said that a move to limit exports would affect HMV.

‘We did not seek out any companies, they decided to move to Guernsey to enter the market as a retail operation.

‘While initiating that, they decided to consider their online business in Guernsey.

‘Companies that have grown here from people that initiated the idea in Guernsey, they haven’t come to Guernsey to exploit something.’

More details of the OUR’s investigation will emerge in the next few days.

‘I’d hope to have a detailed report before the end of the year.’

He added that an export limit would effectively resemble an international agreement between Guernsey and the UK.

‘It’s a concession of theirs. If they agree to leave it in place, we must agree to modify our behaviour.’

Deputy Falla is known for advocating a non-interventionalist style of government.

‘If this wasn’t in Guernsey’s best economic interests, I wouldn’t be enamoured by it.’

In Jersey, a control on undertakings law is used to prevent companies setting up in the island just to exploit the VAT exemption.

Deputy Falla revealed the possibility of an investigation at yesterday’s Chamber of Commerce lunch when pressed on Virgin’s move to Guernsey. It was agreed by the board at a department meeting following that.