VAT loophole worth £355m reviewed by EU

The European Commission (EC) is looking into the possibility of withdrawing the Low Value Consignment Stock Relief (LVCR) scheme.

Talks with member states have begun with a view to ending the scheme, which exempts non-EU sellers of goods to EU consumers from VAT and is estimated to be worth about €500m (£355m) each year.

Discrimination

The EC’s VAT Expert Group last year called for the abolition of LVCR because of fears that it effectively discriminated against EU-based e-retailers.

The scheme means that goods imported into the EU are liable to the VAT rate and customs duties levied by the member state of import, but since 1983, goods worth €10 or less have been VAT and customs free.

However, the measures were put in place before the rapid growth of EU e-commerce and online purchases, which has seen the number of low value consignments increase by 236% between 1999 and 2013.

Administrative burden

Whilst the exemption was originally put in place to reduce the administrative burden on national tax and customs authorities, now the EU fears it is losing out because thousands of small e-retailers under value their shipments in order to exploit the tax break and avoid extra costs.

The UK has already made moves to tackle the problem by excluding goods coming directly from the Channel Islands from the LVCR scheme, which HMRC said was costing the Treasury £140m a year.

VP Global Tax at tax automation company Avalara Richard Asquith commented: "Attempting to track and prosecute sellers from around the world would be impractical and uneconomic."