Question proposed, That the clause stand part of the Bill.

Clause 198 aims to repeal the exemption from VAT that low-value goods imported from the Channel Islands have been entitled to. That exemption is part of the low-value consignment relief scheme—to save time, I shall refer to it as LVCR—under which goods costing less than £15 imported into the UK from non-EU countries are exempt from VAT. Although the Channel Islands are part of the UK, they are not part of the EU VAT area, so goods entering from the Channel Islands are VAT-exempt. Large companies such as HMV, which base their dispatch operations in the Channel Islands, have therefore been able to sell their low-value products more cheaply than companies dispatching from the mainland. Some companies, such as Holland and Barrett, have campaigned for the exemption to be ended on the basis that they cannot compete with companies that do not have to  charge VAT. The clause would end LVCR for the Channel Islands, so that goods imported from there would be subject to VAT.

We support the removal of LVCR from the Channel Islands to protect the interests of businesses based elsewhere in the UK, and to increase the UK tax take. It is right that UK companies be able to trade in their home market without being undercut. However, we have some concerns about how thoroughly the Government have considered the alternatives to that approach, and they have a serious responsibility to do so given the impact that the move will have on the Channel Islands. The Post Office estimates that it will lose a massive chunk of its revenue, and the scale of job losses in the Channel Islands is estimated to be significant. Some estimate that unemployment in Jersey will increase by 50% as a direct result of major companies relocating away from the island.

That relocation could be to the UK mainland. HMV has said that it will transfer its mail order centre from Guernsey to Birmingham. However, in some instances, those jobs could go further afield, because LVCR will still apply to other non-EU countries such as Switzerland, Andorra, and Gibraltar. Companies will be free to move their dispatch operations to those countries and keep the same benefits. How effective is the clause if that option is left wide open? We know that big companies are mobile. There is nothing to stop them moving their packaging and dispatch operations to wherever the tax regime is best, and that is their right. However, it is the Government’s responsibility to look at how to create the best possible regulations in the light of that predictable behaviour.

One solution is to consider withdrawing LVCR from all non-EU countries. It would not be appropriate to commit to that without thoroughly reviewing all the appropriate data, but I ask the Minister to confirm today whether the Government have considered that option and what their conclusion was. Chasing companies from one country to another, and closing loopholes a country at a time, is certainly not sensible tax planning. If the Government plan to do that, they need to ensure that they create a level of certainty for businesses.

Some behaviours can be predicted, and some are less predictable, so one has to question what the actual yield will be from the measure. With regard to the yields that are predicted to result from the Channel Islands loophole being closed, what consideration has been given to the possibility of the loophole being further exploited? We will not oppose the withdrawal of the exemption from the Channel Islands, and we have not tabled any amendments on the subject, but I seek reassurance from the Minister that consideration has been given to the issues, in order to mitigate the concerns that the measure will not achieve its aim.

Clause 198 is about low-value consignment relief. Changes were announced in December 2011 and came into force provisionally on 1 April 2012. The clause changes the rules on import VAT applicable to low-value consignments imported by UK customers from the Channel Islands. The changes apply to imports by both consumers and businesses. Through this reform, the Government aim to ensure that UK businesses,  especially small and medium-sized enterprises, can compete on a level playing field with businesses that have operations in the Channel Islands, and to protect Exchequer revenue. The measure is part of our wider programme to tackle tax avoidance and deliver fairness in the tax system.

Let me briefly provide some background for hon. Members. Low-value consignment relief is a relief from import VAT due on commercial consignments imported from outside the EU. The relief is based on provisions in EU VAT law dating back to 1977. Member states may implement the EU provisions in three ways. First, they may exempt from import VAT consignments valued at €10 or less. Secondly, they may increase the threshold up to a maximum of €22, which is just over £18 at the current exchange rate. Thirdly, they may withdraw the relief from mail order supplies.

From 1995 to 2011, the UK set the LVCR threshold at £18. My right hon. Friend the Chancellor announced in the 2011 Budget that the threshold would be reduced to £15 with effect from 1 November 2011 for imports from all non-EU countries. He also gave a commitment to end the exploitation of LVCR.

As hon. Members know, and as the hon. Member for Newcastle upon Tyne North said, the Channel Islands fall outside the EU’s VAT territory. The LVCR is therefore applicable to goods imported from the Channel Islands. It is worth pointing out that an extraordinary 83% of all low-value consignments entering the UK from outside the EU by post or courier are estimated to originate in the Channel Islands, and much of that seems to be linked to exploitation of the relief. The Government have therefore concluded that the supply of mail order goods from the Channel Islands is distorting the conditions of competition in the UK market. We are committed to ending that exploitation, so in December 2011 we published draft legislation to remove LVCR from all mail order goods imported from the Channel Islands.

The Committee may know that the states of Guernsey and Jersey were unhappy about our decision. Both states launched judicial review proceedings, seeking a declaration that the proposed changes were contrary to EU law. The High Court dismissed those challenges on 16 March, and we heard on 2 April that they would not appeal against the High Court ruling.

May I take the opportunity to put on the record my support for this initiative, which brings commercial opportunities to, for example, the horticulture sector where there are packaging opportunities as a result of the change? As part of joined-up government, will my hon. Friend draw other Departments’ attention to the commercial opportunities that will flow from this, so that businesses such as R Delamore in my constituency can make more use of the opportunities it offers?

I am grateful to my hon. Friend for raising that. He makes a very good point about horticulture, which I know is very strong in his constituency. His constituents have faced competition from the Channel Islands because no VAT would have been payable on the products imported from there. Indeed, there are concerns that items may have been imported into the Channel Islands and exported again with no VAT applying,  which is clearly unfair competition based on a distortion created by the tax system. That is not fair on his constituents and it is one of the reasons we have moved to close down the relief.

I hope that it will be helpful for the Committee if I turn to the detailed provisions contained in clause 198. The overall effect will be to withdraw low value consignment relief for all goods imported from the Channel Islands under a mail order arrangement from 1 April this year. The changes will lead to the alignment of the VAT treatment of Channel Islands based supplies with those of UK VAT registered companies. As a result of the change, there is already evidence that some companies based in the Channel Islands are relocating to the United Kingdom. For example, as we have heard, HMV, one of the largest exporters on the Islands, is closing its Guernsey operation and consolidating its online facilities in the UK—as the hon. Member for Newcastle upon Tyne North has said, in Birmingham. The Office for Budget Responsibility estimates that the measure will increase receipts by around £100 million annually.

The question was raised about whether other options are available to us. When considering the reform of low value consignment relief, we considered whether we should withdraw the relief altogether from selected other countries. We decided not to pursue those options for the time being as the exploitation of this relief primarily involves imports from the Channel Islands, as I have said. However, we will monitor carefully for evidence of the diversion of supplies from the Channel Islands to other non-EU countries, and if that happens on a large scale, we will remove low value consignment relief from mail order imports from those countries as appropriate.

The issues associated with clause 198 are not new. For several years, there have been representations from UK retailers complaining about unfair competition from firms using the Channel Islands to exploit low value consignment relief. They consider what has been happening to be tax avoidance, which has contributed to the failure of some UK retailers. My officials have also had discussions with the European Commission, which has taken a close interest in the issue following complaints made to it by UK retailers. In the light of those representations, we concluded that we should take targeted action to prevent the exploitation of this relief continuing to damage the interests of UK retailers, particularly smaller retailers who do not have the resources to set up operations in the Channel Islands.

It is a fair point—this criticism has been made—to say that this action has taken too long to implement. For those of us who have been involved in these matters for some time, it is disappointing that action was not taken some years ago to address the unfair competition that some retailers have faced. I am pleased that, under this Government, we have been able to progress the matter much more quickly and achieve real progress in the area.

Of course, I welcome the fact that the Opposition are going to support the measure, although I thought that that support seemed somewhat tepid. It cannot be right that we should not take action to deal with something that provides unfair competition to UK retailers because we are concerned about job losses in the Channel Islands. It is not right that we preserve jobs in the Channel Islands at the expense of people in the United Kingdom  on the basis of an unfair tax advantage. Therefore, we have taken the action that is both in our interest and that of fair competition.

On that point, I want to clarify for the record that there was no suggestion in my comments that jobs should be protected at the expense of onshore jobs in the UK. The point was that the decision to make the change must be well considered, given the impact that it will have, and that there is a need to acknowledge the impact on workers in Jersey.

I am grateful to the hon. Lady for that clarification, although I would expect the priority of the hon. Lady to be—I am sure that this is her position—removing a distortion in our tax system, especially an unfair distortion that potentially may have been costing jobs in UK retailers.

In conclusion, this Government have listened closely to the views of UK small and medium-sized enterprises and looked at the revenue implications of low value consignment relief. From the evidence collected, the Government have decided to remove LVCR from mail order imports from the Channel Islands, which will enable UK businesses to compete on a level playing field and protect revenue for the Exchequer. It will contribute to promoting fairness in the tax system and tackling avoidance activity. After years of inaction, I am pleased that this Government are able to insert this clause in the Bill.

Question put and agreed to.

Clause 198 accordingly ordered to stand part of the Bill.