Treasury to close loophole that allows VAT-free DVDs

The government is to change the tax rules that have allowed retailers to avoid paying VAT by sending goods from the Channel Islands.

Low Value Consignment Relief (LVCR) will not apply to goods sent from the Channel Islands to the UK from 1 April.

The loophole has been used increasingly in recent years by companies selling CDs and DVDs online, such as Play.com, Tesco and Amazon.

The government said the loophole was now costing £140m a year.

The chief minister of Guernsey, Deputy Lyndon Trott, said the change would have a "significant impact" on the islands.

The maximum price of the goods allowed under LVCR was cut from £18 to £15 on 1 November following an announcement in the Budget in March.

"These reforms will ensure that UK companies, especially small and medium-sized enterprises, can compete on a level playing field with those larger companies with the resources to set up operations in the Channel Islands," said David Gauke, Exchequer Secretary to the Treasury.

LVCR was originally established as a VAT exemption for goods coming from outside the EU. The idea was to prevent EU members having to collect small amounts of VAT, when collecting it would cost more than it was worth.

The problem has been that the Channel Islands are treated as being outside the EU for VAT purposes.