Figures seen by Channel 4 News reveal the rapidly-growing cash lost to the Exchequer through the import of VAT-exempt goods such as CDs from other offshore centres, writes Business Producer Ben King.
The commonly-quoted figure for the Treasury's loss is £130m a year on goods shipped VAT-free from outside the European Union. But Treasury projections released to Channel 4 News under the Freedom of Information Act reveal that the cost will be significantly higher this year - lending support to calls to close what many consider to be a damaging tax loophole.
In their reply to our FoI request HM Revenue and Customs stated that the figure for the year to the end of June 2010 is in fact £140m, rising to £155m for 2011.
The HMRC says of 2011 that the effect "assuming no changes in the volume of goods supplied under the relief (which allows VAT-free imports of low-value goods) compared to the level in the year to 30 June 2010, will be to increase the cost of LVCR to the Exchequer to £155m annually."
Anything worth less than £18 can currently be shipped from the Channel Islands without paying VAT - which enables retailers to undercut UK-based competition. The exemption, known as Low Value Consignment Relief (LVCR), was originally introduced to encourage the trade in fresh goods such as vegetables and flowers, which would otherwise rot in port while the VAT paperwork was processed.
The rise in the 2011 figure will partly be due to the increase in VAT to 20 per cent this year. But it doesn't build in any increase in purchase of goods from offshore, even though the rise in VAT makes the cost advantage of Channel Islands websites stronger. The ultimate figure could easily be higher if the Government doesn't act.
The birth of internet retailing has led to a steady rise in VAT-free imports of a huge range of goods. Some are sent by independent retailers like Play.com and Seven Day Shop. But now the majority of big high street brands ship a proportion of their internet orders from the Channel Islands, including HMV, Sainsbury, Tesco, Amazon and Asda.
The best-known items are CDs and DVDs. Sales of these items are falling as customers move to electronic downloads, but other goods are taking their place, from handbags to customised greeting cards.
The VAT relief applies to goods from any country outside the EU, and increasingly retailers from many different countries are exploiting it. You can buy VAT-free electronic goods from Hong Kong, and DVDs or even tights from Switzerland.
The Chancellor is expected to move on the loophole in Wednesday's Budget, potentially reducing the threshhold for LVCR from £18 to a lower figure. Treasury Minister Lord Sassoon told the House of Lords this month: "We are reviewing the operation of this relief. Ministers hope to be in a position to announce any possible changes to LVCR...in the Budget on 23 March."
The change would be welcomed by independent retailers in the UK, who blame cheap competition from VAT-exempt internet operations for putting them out of business.
But it would hit businesses on the Channel Islands, where the sector known as "offshore fulfilment" is a significant employer.
It could also hurt Royal Mail. Sources within the industry told Channel 4 News that most of the goods shipped from Guernsey and Jersey are shipped by the two companies' postal services, and then delivered in the UK by Royal Mail. If that trade moves back onshore, a much larger proportion will be delivered by other postal operators.