VAT-free DVD clampdown threatened

VAT-free CDs are costing the UK Treasury about £85m a year

Cheap CDs and DVDs bought in the UK on the internet from the Channel Islands could become a thing of the past.

The British government is threatening to ban retailers from exporting goods to the islands before re-importing them in order to save on VAT.

Critics say the trade is damaging small independent shops and costing the UK Treasury at least £85m a year.

Jersey and Guernsey stopped UK firms' distribution bases on the islands, but local companies still offer the goods.

Under current tax laws, shoppers do not have to pay VAT or import duty on goods brought in from outside the European Union (EU) that cost less than £18.

Island reputations

Larger UK retailers, such as supermarket giants Tesco and Asda, took advantage of the rules to sell cheaper CDs and DVDs imported from the islands which are not members of the EU.

More than 30m packages were sent from Jersey alone in 2005.

Supermarkets said they were merely offering the best deal for customers.

But they suffered clampdowns from the islands' governments following pressure from the UK, criticism in some of the national media, and concerns the practice was damaging the islands' reputations.

However, UK MPs are concerned still not enough is being done.

'Effective solutions'

In the House of Commons on Thursday, Treasury Minister Dawn Primarolo told the Commons she was "disappointed" with the response of the islands so far.

She said: "We have asked Jersey and Guernsey to find effective solutions.

"If we find they are not effective, I've made it clear and I confirm again today, that the UK Government will take action to reform the operation of the VAT relief."

Jersey's government, the States, said some companies had been given until next January to change working practices or leave.

A Jersey government watchdog report has also called for a centralised policy with a leader, or e-commerce tsar, and a code of practice to promote the industry.

Guernsey said it had made several moves to protect its "reputation and integrity".