DVD prices to rise as VAT rules tightened in budget move that will cost shoppers £130m

By Daily Mail Reporter
Updated: 08:08 EDT, 4 March 2011

Counting the cost: Chancellor of the Exchequer George Osborne is keen to clamp down on tax avoidance

A sales tax loophole used by millions of Britons to buy cheap CDs, DVDs, computer games and even contact lenses from the Channel Islands is to be closed.

Chancellor George Osborne is expected to change VAT rules in a move that will cost shoppers at least £130million a year.

Currently, high street retailers like Tesco,  Asda, Sainsbury's, and Boots use internet stores based in the Channel Islands to offer VAT-free prices.

Amazon and other fast-growing internet specialists, such as Play.com and TheHut.com, use the same ploy.

The decision to close the VAT loophole could add £2.80 to the price of a blockbuster DVD such as Inception, taking it up to £16.76. A chart CD, such as Rihanna's Loud, could go up by around £1.80 to around £10.80.

Under the current law, low value items costing less than £18 can be imported to the UK and from locations outside the EU - such as the Channel Islands - without carrying VAT.

The arrangement was condemned by small independent chains and others for many years, amid claims it was robbing sales from the high street.

Critics claim the VAT-free deal led to the closure of hundreds of stores and fuelled the difficulties of chains such as HMV, which has recently issued a number of profit warnings.

The last Labour government rejected repeated calls to change the VAT rules, insisting it was not a loophole.

However, it appears the Coalition is determined to put an end to the VAT-free purchases in the latest effort to boost income and cut spending to tame the national debt.

The Chancellor criticised the system when in Opposition and he is expected to ban it in his budget later this month.

Treasury minister Lord Sassoon signalled the plan, telling the Lords: 'We are committed to tackling tax avoidance and, in that context, we hope to be in a position to announce possible changes to the operation of LVCR (low-value consignment relief) in the budget.'

He said that, in contrast to the Labour government, which had been reviewing the VAT rules since 2006, the new administration had 'immediately gripped the situation'.

Tesco said: 'To date all the savings that are made on buying items, such as DVDs and CDs, from our Guernsey business have been passed on to consumers. Consumers have been the winner, we don't make any money from this arrangement.

'Our concern all along has been that there should be a level playing field for everyone selling these products. For that reason we are prepared to go along with the government's plans.'

The Forum of Private Business, which has been campaiging for many years for an end to the VAT loophole, welcomed the expected change.

Spokesman, Chris Gorman, said: 'It appears the government has finally seen sense of this. It has been hugely unfair having a tax loophole that could only be exploited by big multi-national businesses to the detriment of tiny little high street traders.

'We are very glad that government has finally recognised what a big issue this is.
'There has been a feeling among many small businesses, particularly record shops and others selling low value items that they have been really unfairly treated.'