A CRACKDOWN on retailers exploiting the so-called VAT loophole could impact on Virgin’s plans to open a distribution centre here. The company has recently followed in HMV’s footsteps in setting up Virgin Megastores Online (Guernsey) Ltd potentially to exploit the island’s VAT-free status and distribute entertainment products to customers in the UK and Ireland ordered via its website.

It has already advertised for a finance manager to run the operation, but Commerce and Employment deputy minister Carla McNulty Bauer said that the Office of Utility Regulation’s report into the effects of the VAT de minimis limit might change that.

She reacted angrily earlier this month when she found out about Virgin Megastores’ move only because of a recruitment advertisement in the Guernsey Press.

‘We weren’t aware of it beforehand because they had not come through us to seek housing licences or change of use.

‘It’s possible this report might change their plans, but it’s really something Virgin needs to answer.’

Under current VAT rules, businesses can export goods to the UK tax free as long as the item is worth less than £18.

This concession was introduced to avoid the cost of collecting VAT on low-value items, which could exceed the actual sum collected, but it is of benefit to local businesses exporting a range of goods by bulk mail through the postal system, principally to the UK.

Because of that, Commerce and Employment has asked the director-general of the OUR to review the operation of Low Value Consignment Relief in respect of CDs and DVDs from the Channel Islands.

‘It is recognised that what could be considered to be excessive exploitation of this concession may lead to moves to remove or severely restrict its application.

‘The Jersey authorities have come to an agreement with their bulk mailers of DVDs and CDs and the UK Government to avoid this risk.

‘The aim of the review is to identify what action may be taken locally to reduce any risk to established local businesses and enter into an agreement with the UK Government similar to that entered into by Jersey.’

Following completion of the review, Commerce and Employment will consult relevant parties in the private sector, Guernsey Post, Treasury and Resources and the Policy Council to agree the best way forward.

An HMV spokesman said any possible change to the VAT rules was, as yet, pure speculation. ‘We are not aware of any official notification of this and, as such, have no comment to make.’

Virgin Megastores was yesterday approached for a comment, but at the time of going to print today had not responded.

Deputy McNulty-Bauer said she fully supported the intentions of the report, which could see the VAT exemption modified or scrapped, because she wanted to protect home-grown companies.

‘It’s been a problem for the UK Government for some time because of lobbying by UK-based retailers.

‘What we are doing now is asking the OUR to do this report to look into its effects on Guernsey’s economy.’