I am delighted to have secured this debate to discuss the £18 VAT relief threshold on which online retailers avoid paying VAT on sales of CDs and DVDs. I intend to be reasonably brief, because I am aware that other colleagues may wish to make a contribution and because I want to give the Paymaster General a reasonable amount of time to respond to some of the issues that we hope to raise, in order not to dilute the importance of the issue and because she and her officials are well-versed on the matter.
Perhaps it would be helpful if I explained a bit about the loophole that allows retailers, particularly large supermarkets, to export goods to places such as Jersey and Guernsey and then to import them back into the UK. I have spoken to many independent retailers in my constituency over the past few months who are keen to see that loophole closed if possible. They include Mike Dillon of Apollo Music in Paisley, who recently commented that he could buy stock more cheaply from a supermarket than from the wholesaler. Surely that is wrong. He said:
“I am really concerned about this new venture from the major retailers and genuinely believe that at the current rate the business that I established back in 1972 has at best five years left. We must be able to compete on a level playing field. There is a genuine threat to many small businesses within the UK due to many larger retailers exploiting the tax system to sell cheaper goods from the Channel Islands without charging VAT.”
As long as the contents of each package dispatched has a value of below £18, then no VAT is due. For example, if a customer goes online and orders seven or eight items they are all dispatched separately and retailers avoid paying tax.
I thank my hon. Friend for bringing the NAO report to the attention of the Chamber. I have not had the opportunity to digest all the recommendations, but on the face of it it seems complex and detailed and I am sure that the Minister will have the opportunity to respond to its recommendations.
The Government are aware of the increase in the volume of imported goods with a value not exceeding £18 and of the fact that a number of UK retailers have restructured in order legally to achieve VAT-free sales to UK customers. I understand that the situation is being kept under review, taking full consideration of UK consumers, businesses and taxpayers. I ask the Minister: where are we with the review and are we compliant with EU legislation? Perhaps we could follow the example of the Danish Government, who sought permission from the European Union for a special dispensation to close the loophole altogether. Although I accept that that is a long-drawn-out process, it might be worthy of further consideration.
More than 30 million packages were sent from Jersey in 2005 with a considerable loss of revenue to the Treasury. Often the reduced tax liability outweighs the increased postage costs, meaning that the Jersey-based retailer can undercut competing retailers based in the UK mainland. It is easy to export UK goods to the Channel Islands, because they are so close to the UK. In recent years Jersey Post, through its sister company Jersey Post Logistics, has set itself up as an internet fulfilment operation taking full advantage of the low value consignment relief, otherwise known as the LVCR, service so that goods can be sent from the UK to Jersey and back by mail order within 48 hours.
It has become easier to sell by mail order with the growth of the internet. The practice of selling CDs and DVDs through the Channel Islands has become ever more common, particularly since Jersey and Guernsey are part of the UK postal system and benefit further from lower postage rates. The Government mentioned the matter in the 2006 Budget, when they stated that they were aware of the abuse of the LVCR by companies that had set up in the Channel Islands and that they would, if necessary, introduce legislation to stop the avoidance of VAT if companies continued with such behaviour. The Budget also stated that£85 million a year was being lost in unpaid VAT as a result of the trade.
I congratulate my hon. Friend on securing this important debate. I want to quote from a letter than I received from a local retailer, Fopp music and books in Dundee. It stated:
“The letter is not about ‘bleating’ about being undercut on prices. It is about asking why UK businesses such as our own are being asked to compete with organisations on such an uneven playing field due to the fundamentally inconsistent manner in which VAT is being applied.”
Does my hon. Friend agree, as I do, with that interpretation of the problem?
I thank my hon. Friend for that intervention. I think that he reflects the mood and the concerns of retailers the length and breadth of the country, who are concerned that they are losing business in unfair competition. They are asking us, as legislators, to deal with it. That is only right and proper.
As I have said, it is estimated that we are losing£85 million per year.
I have also been contacted by Fopp, which has its warehouse in Brislington in my constituency, not a million miles from the constituency of my right hon. Friend the Paymaster General. Is my hon. Friend aware that according to Fopp the lost VAT revenue will be closer to £200 million?
I will respond to my hon. Friend the Member for Bristol, East (Kerry McCarthy) first. As I said, £85 million a year is being lost in VAT revenue and my hon. Friend is right that that figure is estimated to rise to £200 million. I am sure that the Treasury could find ways of spending an estimated £200 million.
As I said earlier, the local business person I am dealing with, Mike Dillon, estimates that his business could close in the next five years. That means four or five jobs lost in his business alone, so if we multiply that by the thousands of small retailers then thousands of employees could lose their job as a result of the tax loophole, which I hope we can do something about.
In conclusion, will the Minister address the issues that have been raised so that we can create a level playing field for local retailers, many of whom are in danger of going out of business? That would have a devastating effect on many of our communities and high streets, and I and many of my colleagues who have taken an interest in the issue look forward to what we hope will be a positive and constructive response from the Minister.
I certainly shall, Mr. Jones. I have only a few points to make.
First, I congratulate my hon. Friend the Member for Paisley and Renfrewshire, North (Jim Sheridan) on securing the debate. As chairman of the all-party group on music, I am concerned about some retailers selling and importing goods to mainland UK VAT-free and about how that affects the music industry.
As my hon. Friend said in his excellent contribution, it is not a level playing field. Artists, songwriters and composers—the ones who make the money from the stuff being bought and sold—are the most affected by this VAT loophole, and small businesses suffer because of unfair competition. As well as the financial losses mentioned today, the loophole will have a knock-on effect on up and coming artists. It is a well-known fact that small independent record stores promote and advertise new talent and new artists. If those stores continue to suffer the problem, they will no longer have the finances to continue in existence, and new talents will go undiscovered. For example, Anthony and the Johnsons, a New York city band whose main singer is British and which won the Mercury music prize for best album in 2005, would have gone undiscovered had it not been for a specialist retailer.
In the constituency of my hon. Friend the Member for Glasgow, Central (Mr. Sarwar), an independent record store used to employ four people. After a drop in sales of around 20 per cent., and because of the difficulties of competing with offshore retailers, the store cut its staffing to the owner and his wife. Eventually, when the lease was due for renewal, the store was forced to close. Even more disappointing was the fact that the owner often found himself providing advice and recommendations on particular artists and music only to find his customers leaving the shop and purchasing the music online or from supermarkets at a much reduced price.
Gone are the days of waiting in anticipation of the release of a CD on a Monday morning or the excitement of receiving a new album at Christmas time—the period where record stores used to see an increase in trade. Instead, we can order at a click of a button, and for a cut price. The big supermarkets and music retail chains that buy CDs offshore have no particular interest in the music industry; they are concerned only about good value for money. There is nothing more sacred than the independent record store owners’ passion for music. That and the future of the industry is under threat if the problem is not dealt with soon. Only by removing the VAT loophole will specialist retailers again be able to trade effectively, providing expert advice along with reasonably priced CDs and helping new local music stay alive.
I hope that the Paymaster General will take on the points that my hon. Friend the Member for Paisley and Renfrewshire, North and I have raised. If she does not, and if the loophole is not closed, not only will small retailers who give advice to the public go out of business, but we will also lose some excellent music of the sort that we have come to know and love over the years.
I congratulate my hon. Friend the Member for Paisley and Renfrewshire, North (Jim Sheridan) on raising the issue. I start by saying that it is not a loophole, and I shall explain why.
When the rules were established in 1983, there were 15 member states, 12 of which operated that exemption; it was very much about competition, competitive advantage and the question of burdens on business. I say clearly to my hon. Friend the Member for Bristol, East (Kerry McCarthy) that that was what underpinned the exemption. We can all pick figures out of the air, saying how much it may cost the Government, but that is not fruitful. And I do not recognise the figure of £200 million at all.
I have been generous in allowing more than one speaker in the debate, and important points remain to be answered. If I can answer the major points and there is time left, I will be more than happy to give way.
The debate is specifically about CDs and DVDs. However, the £18 VAT relief threshold built into the legislation applies to all goods imported into the United Kingdom from outside the European Union—and Jersey and Guernsey are outside the EU—except for alcohol and tobacco products. Relief from the payment of import VAT is enacted under European Community VAT legislation, and it requires member states to exempt from import VAT all such goods with a value of less than €10, although member states can increase the exemption to €22, or £18, if they so wish. However, the legislation allows member states to exclude mail-order goods from the exemption. Like the majority of member states, the UK has always applied the maximum relief allowable introduced by the directive in 1983.
As my hon. Friend the Member for Paisley and Renfrewshire, North acknowledged in his excellent contribution, the Government are aware of the increase in the volume of goods sold, particularly of CDs and DVDs from the Channel Islands. I have asked the Treasury and Her Majesty’s Revenue and Customs to keep the matter under close review, and they have received a considerable amount of correspondence and information on this issue, including representations from the forum for private business and its members. Those submissions assert that there is a causal link between the importing of CDs from Jersey and Guernsey and the economic viability of their companies. I shall return to the complexity of that argument a little later.
Hon. Members will be aware that the Government have continued to discuss the matter with the states of Jersey and Guernsey. Our initial response was to ask them what action they would take to stem the flow of imports. Jersey announced earlier this year that UK companies operating in the CD and DVD market through third party suppliers based in Jersey would need licences to run their businesses, and that those without a licence would be required to obtain one. Such companies would be granted time-limited licences, and our understanding is that such licences will not be renewed after 28 February 2007. The state of Guernsey is unable to apply a similar rule, but it will no longer encourage new UK companies to set up and operate through third parties. Frankly, both proposals are disappointing.
I assure hon. Members that we continue to liaise with Jersey and Guernsey, asking them to find effective solutions. We have made it clear—and I confirm it now—that if we judge that they are not effective, the Government will take action to reform operation of the relief. I shall now touch on what that action might be, especially as my hon. Friend raised the subject of the Danish derogation.
Should the Government decide to reform the relief, a number of options will be available. We could reduce the threshold to £7, or we could seek a derogation from the European Commission to disapply the relief to imports from the Channel Islands; or we could disapply the relief specifically to CDs and DVDs from the Channel Islands. Various combinations of those and other options will be available. In deciding which options to use, the Government will need to consider not only the impact of small UK retailers but the knock-on effects on other stakeholders and larger suppliers.
The Government will have to consider the effect that changes may have on the costs to business. For example, the Royal Mail and similar express carriers would be responsible for the carrying and delivery of such packages and would incur additional costs in collecting charges from those receiving the packages. Of course, consumers and businesses would face an increase in the cost of goods purchased, not only in respect of increased VAT but from charges that those carriers would incur when clearing packages through Customs. Indeed, the Government, who are responsible for collecting it, would then have to increase charges as a response.
The Government take the view that we need to balance all of those interests, and my hon. Friend is quite right on that point. We need to look at all aspects of the tax system and balance the costs of compliance and enforcement rules against the need to protect revenue and minimise distortions in the market. Clearly, in considering the economic link between importing CDs and retailers, the Government need to take account of the other pressures on retailing in this sector. For instance, the change in the market for audio-visual products, which is undergoing rapid structural change as consumers switch to downloading music and, increasingly, video and film over the internet. We have recently seen notable successes of young talent who have made their name exclusively via that medium.
Clearly, all those considerations need to be taken into account, but my hon. Friend has made a very powerful case and I want to assure him that the Government weighed up the options that were available in the Budget 2006 considerations and decided that the case for change had not been conclusively made. I assure him and other hon. Members today that the Government are keeping the issue under active review.
I am sympathetic—
I will when I have finished this sentence, but I feel that I should allow my hon. Friend the Member for Lewisham, West (Jim Dowd) to intervene first, and then I should have time to give way a second time.
I am sympathetic to the position of small UK music retailers, and it must be recognised that the competitive pressures on them are not solely or perhaps even mainly related to the VAT relief enjoyed by offshore online retailers. Nevertheless, the competitive issues will need to be considered and if a case is made, the Government will need, in the coming months, to consider very carefully the opportunities they have and how they want to respond.
When I initially asked my right hon. Friend to take my intervention, it was when she said that she did not recognise the figure of £200 million. It comes from the then Economic Secretary’s evidence to the Treasury Committee in February 2005. He said that the relief was leading to a loss of about £80 million per year, but the figure was set to grow over the next few years to a couple of hundred million. The figure of £200 million was actually authenticated by a Treasury Minister.
I am chair of the all-party small shops group. Earlier this year, we produced a report on developments in which we made particular reference to what the Minister says is not a loophole—everyone understands that. I thank the Minister for her answer to my question in July this year saying that the Government are keeping the matter under review. I do not understand why Denmark got a derogation on the grounds of the way publications were being printed in the EU and then recycled and sold back into the EU for less than EU citizens could buy them for. We could go to the minimum limit—the €10—and apply for derogation at the same time. Why can we not do both?
On the first point, the figure that was quoted by the then Economic Secretary related not only to DVDs and CDs but to the wider challenge of selling through the internet and the best way to deal with that. Clearly, it is the wider consideration that the Government will also be looking at because we would need to consider the impact on competition here, the increased burdens on administration and the necessary steps to take. I gave one example, which was to return to the EU for a derogation. All of those are under active consideration.
On the point about the loophole, in this case this provision has been legislated for. It is not a loophole: a loophole is where legislation is used in a way that it was not legislated for. The issue has been specifically legislated for here and has been since 1983.
My hon. Friend the Member for Paisley and Renfrewshire, North is right to say that we can return to the matter if we choose to, and I have outlined all the options. Before deciding whether any of those options are appropriate, we need to consider the current situation more broadly and what is the most effective way to deal with it. That is where the Government are at present. My right hon. Friend the Chancellor of the Exchequer will be in a position to notify the House of his decisions in the normal series of events in the calendar.
I apologise to my hon. Friend the Member for Paisley and Renfrewshire, North for turning up after he had started the debate, and I congratulate him on securing it. I want to turn to the wider issues, which I understand my right hon. Friend may not be able to respond to directly. I do so as chairman of the all-party small business group, who tabled the early-day motion on this matter, of which I am sure she is aware. She will also be aware of the wider concerns provoked by the report earlier this year of the all-party small shops group and the concern in the retail industry about a level playing field for small businesses on the high street. The activity being undertaken further undermines that level playing field. Whether it is a matter of saving £85 million or £200 million, the Government—perhaps not the Treasury but the Government generally—have to be aware of the wider concern, shared by the vast majority of the population, that we need to sustain small businesses in our communities, not only for the music industry but more generally.
I do not disagree with many of the sentiments that my hon. Friend has expressed, but I do not make decisions as a Treasury Minister on the basis of only a section of the economy. As important as that section of the economy is, I need to make decisions,as I have been implored to do in the contributionshere this afternoon, in the round, on the basis of competitive issues. A number of things are relevant. Small businesses are vocal on a large number of issues, and rightly so. A particular one at the moment is what they see as burdens on small businesses, as a result of changing administrative practices when something else is being prevented.
My initial response to this issue was to prevent it in the first place, which involved requiring, by persuasion, Jersey and Guernsey to consider how they could take steps to deal with it, and they have produced proposals that may or may not be effective. At present, I am seeking more, which would give the outcome that my hon. Friend the Member for Paisley and Renfrewshire, North wants—the products could not come to the UK from the people who are going offshore at the moment, without requiring any greater or further administration. That is my preferred route. I have said to my hon. Friend this afternoon is that if that is not deliverable, other routes will be pursued and naturally I will keep him informed on that, given that he has been successful in securing this debate and has put a very powerful argument. I have made it clear that we could be talking about a change in the threshold, a specific derogation on certain goods, a general derogation or any combination thereof.
I hope that I have made it clear that if I was going to say no, I would have said it right at the beginning. I am saying that the debate is complex and there are important competition issues that need to be considered.
I am sorry; we are at the end of the debate. I will take this issue forward. I know that all hon. Members present take a keen interest in it and I will be happy to keep them informed, when I am able to, of the Government’s decisions on the matter.
Question put and agreed to.
Adjourned accordingly at one minute to Five o’clock.