Tax Free Imports - A case of Déjà vu ?

The BBC has reported that there has been a surge in the number of small parcels (worth £135 or less) shipped from China to the UK, the value doubling in 2024–25 to £3 billion, up from £1.3 billion the previous year. This follows a report from Sky News that first broke the story. The increase is largely attributed to Chinese e-commerce giants Shein and Temu who offer cheap goods to UK consumers that benefit from the import tax exemption. This causes significant market distortion and harms UK retail. Shein and Temu made up 51% of all low-value global imports to the UK last year. That is a staggeringly large figure ... and yet we have been here before.

In 2008 I was fighting against the Channel Islands use of a VAT exemption called Low Value Consignment relief, essentially on behalf of UK music retail, since the majority of the goods sold were CDs and DVDs sourced in the UK. The abuse of this relief was a precursor to the Chinese trade that we see today, in that it involved a number of companies who were using an import tax exemption to avoid having to pay VAT on sales made over the internet to consumers in the UK. Goods sent from The Channel Islands were exempt from VAT if they were valued at £18 or less (shortly before it's removal the exemption was lowered to £15).

Treasury officials were fully aware of the abuse and the enormous rate of growth of the companies involved, chiefly Play,com and The Hut. In 2008 according to statistics relied upon by Treasury officials but not made public, 75% of LVCR packages entering the UK originated from The Channel Islands and there had been a sharp increase in UK businesses wishing to “relocate” to the islands to take advantage of the relief. HMV had been forced, reluctantly, to set up in Guernsey in order to remain competitive but faced the unedifying prospect of undercutting its own High Street stores. By 2010 the ever increasing damage that this trade was inflicting on the UK economy, online retail and in particular music retailers like myself, was critical. The Guardian had already covered the LVCR trade and in December of 2010 ran a very large feature in their G2 supplement exposing just how ridiculous the situation had become.

By the end of 2010 I had managed to persuade the EU Commission to intervene, and they eventually threated the UK with infraction proceedings if nothing was done to curtail the abuse. I rang the head of Excise Customs Stamps & Money to make it clear I would be providing the EU Commission with all the documentary evidence that HMRC had failed to produce. At that point I was finally taken seriously! I didn't relish having to take such drastic measures but was left with no other option due to a complete indifference to the problem in Whitehall.

On November 9th 2011 George Osborne - who I had corresponded with on the subject prior to the coalition Government - announced the removal of the LVCR exemption from Channel Island mail order goods. The trade collapsed almost overnight which was a huge relief to UK businesses and pretty much saved the Record Shop. My MP Dame Cheryl Gillan was approached by a businessman who said that removing LVCR from The Channel Islands was the best thing that the Government had ever done. However in the midst of the celebrations I distinctly recall getting a rather cryptic email from a Channel Island trader who stated "you may have won this battle but just wait until the Chinese hit you".

At the time I knew that some Chinese goods were flowing into the UK via the Channel Islands but generally Chinese goods were sold within the UK by reputable wholesalers and UK Online Traders. Later they would cut out these wholesalers and UK traders and sell direct to consumers. Just after the Channel Island trade collapsed I was informed by a member of RAVAS that the Gibraltar postal service was entering into an expedited customs arrangement with the UK in order to take advantage of LVCR, mainly for selling ink cartridges (thankfully the island was too small for much else). Given that the UK had just closed down the Channel Island arrangement under threat of infraction proceedings from the EU this new and identical trade via Gibraltar was to say the least surprising. When I queried it with a senior HMRC official I was told that it was "within the law". It makes you wonder if anything at all was learnt from The Channel Islands fiasco...

So in 2025 the UK finds itself in the exact same situation it faced from The Channel Islands abuse but with China, on a vastly greater scale and with a higher VAT de minimis. This time around UK retailers do not have the option of moving to China or calling in the EU Commission. In 2010 it had been very difficult for me to get public support from companies impacted by the LVCR abuse because several of them, including HMV, had joined in.  This time around however, every major retailer in the UK is rightly concerned about the avalanche of tax-free goods coming in from China. Every category of product is available and thanks to economies of scale reducing freight costs it is possible for these goods to be sent directly from China to UK consumers. There is no benefit at all to the UK economy and the suggestion that the trade "helps the poor" is economically illiterate. If the Government wishes to help the less well-off then it can do so by cutting taxes not by giving an advantage to only those able to order goods from China.

Neither is this problem a surprise. Just like the Channel Islands abuse the red flags were visible years ago. RAVAS first campaigned about the Chinese trade back in 2015 initiating a BBC Radio 4 documentary and a number of high-profile media exposes including a Panorama investigation ‘The Billion Pound VAT Scam’. After interest from the National Audit Office and Public Accounts Committee there was gradual yet seemingly reluctant change. In 2017 HMRC confidently told the PAC that estimated VAT losses from the Chinese trade equated to £350m a year. When eventually in 2021 Online Marketplaces were made to collect VAT from non-UK sellers then in the first year to 2022 £1.4 billion in VAT was collected. This confirmed the £1 billion VAT fraud that RAVAS had alerted the UK Treasury to in 2015.

In 2020 I was involved in discussions with HMRC and HMT regarding the proposed legislation that was to be introduced the following year. I noted that the 'de minimis' that was previously applied to LVCR was being raised to £135 and that this would be abused. I never had a reply that made any sense and now the £135 threshold is being abused exactly as I had predicted. Additionally, the application of Postponed VAT Accounting (PVA) to all Chinese imports since January 2021 has allowed disreputable traders to evade VAT on import as well as on retail.

I do not wish to cast a negative light on HMRC and HMT because this is a global problem and one that involves a great deal of complexity however there are straightforward solutions to this issue that are not being applied. Firstly, Online Marketplaces should collect VAT on all sales not just those made by retailers that are located outside of the UK, because many of them pretend to be inside the UK. This could be implemented almost immediately at minimal cost. Secondly the £135 de minimis should be scrapped and a technological solution should be invested in to collect VAT and duty at the border where it is not being collected by an Online Marketplace. It may cause a log jam but retailers wishing to retain their customers will pre-pay tax and avoid that log-jam if it is easy to do. Thirdly the use of PVA needs to be reviewed and if necessary, it should be scrapped either selectively or entirely. Finally the UK needs to make its virtual customs borders robust and invest in technology and the Government needs to think about using imports as a tax revenue stream with increased duty rates. Half of all product categories attract no duty at all. It doesn't require the kinds of obstructive tariffs applied in the USA but I do not see any issue with adding £1 in duty to the cost of a phone charger that only costs £2 or applying a fee to each shipment. Such measures would also protect UK retail.

HMRC also needs to invest in a team to tackle Online Retail that includes individuals who have expert knowledge and insight into the trade. It would require only a small team devoted to both spotting and frustrating fraudsters and recommending fast track changes to legislation so that loopholes are plugged rapidly and not allowed to gain economies of scale. At present the system requires Parliament to recognise the problem and then require HMRC to fix it through debate and legislation a process that is incapable of reacting fast enough. To be effective such a team would require a deep knowledge and experience of Online Retail. To put it in perspective myself and my colleagues Neven Juretic and Julius Oliveti have spotted and reported literally billions of pounds of fraud that was not being detected (and is still not being detected). We have been able to do this because we have spent decades selling goods online. It took only three of us. When I dealt with the Channel Island trade I did it on my own.

Thos ewho fail to learn from history are doomed to repeat it. The cost of ignoring this issue is harm to UK retail, the UK economy and everyone who depends upon it. One only need glance at the list of business failures in recent years to see that none of them are Chinese....