VAT Loophole Campaign

RAVAS was formed in 2010 in order to campaign for the ending of the abuse of an import VAT Exemption called LVCR which was being used by retailers to avoid charging VAT on mail order goods. RAVAS has already taken effective action against the abuse of LVCR in the Channel Islands (who are outside the EU for VAT purposes) by complaining to the EU Commission which forced the UK Government to take action. The RAVAS complaint resulted in the exclusion of Channel Island mail order goods from LVCR and the clarification that member states are obligated to prevent LVCR from being abused for VAT avoidance purposes. RAVAS supported HMRC in a major court hearing in London in March 2012 where the Channel Islands abuse of LVCR was examined. The court confirmed that the UK was free to selectively exclude Channel Island mail order goods from LVCR and this not only ended the Channel Islands offshore fulfilment industry but also highlighted he right of member states of the EU to remove goods from LVCR selectively in order to prevent abuse and VAT avoidance.

What is LVCR?

Low Value Consignment Relief or LVCR exempts goods of a certain value from VAT when they are imported into a member state. LVCR is a pre-single market piece of legislation that was intended to help the flow of goods between EU member states when they still had customs borders and was also an administrative simplification that meant small sums of VAT did not have to be collected. It was an early attempt at free circulation i.e LVCR is now redundant and is due to be scrapped by the EU and UK in 2021.

RAVAS was involved in an report on LVCR put together by Ernst and Young for the EU Commission. You can read the report here

What is LVCR Abuse?

LVCR is a legitimate EU import VAT relief but ‘circular shipping’ and ‘order splitting’ are practices that are employed to abuse LVCR and avoid VAT to gain a trading advantage over other EU traders. EU law obligates EU member states to apply LVCR in a way that prevents the abuse of LVCR and VAT avoidance. LVCR was not intended to be used by retailers to mail order goods VAT free in the EU. Using it for this purpose is an abuse.

What is offshore fulfilment?

Offshore fulfilment in Europe is the fulfilment of mail order goods from a non-EU location in order to take advantage of an import VAT exemption called Low Value Consignment Relief or LVCR. Items are sent to a location outside the EU so that when they re-enter the EU by mail order they can take advantage of LVCR which exempts the goods from VAT. The trade involves the supply of EU and non EU goods to EU customers via an offshore hub, often by a retailer located in the EU who has set up a company structure offshore to take advantage of LVCR. EU goods are sent to the offshore hub in order that they can be sold back again into the EU by mail order. This circular trade is called ‘circular shipping.’ A second practice called ‘order splitting’ dictates that any items ordered from an offshore fulfilment hub will be sent individually so that they can fall below the threshold at which LVCR operates (currently £15 in the UK) and benefit from the import VAT exemption to the greatest degree. For example if two items with a value of £13 each are ordered from a retailer then rather than being sent together they will be despatched in two separate packages with a value of £13. This is so each packet qualifies for the VAT exemption. If the items had been sent together they would have a total value of £26 which is above the maximum LVCR value threshold and VAT would be payable. The threshold varies from member state to member state depending upon what level it is set which can be between 10 and 22 Euros.