However, amid concerns that it had become a ‘loophole’ exploited by some businesses, the UK taxman decided to clamp down.
The limit was reduced to £15 in March 2011 as the UK began a rethink ahead of scrapping the relief altogether.
Section 199(3) of the Finance Act 2012 removed the LVCR VAT relief from low value goods sold to UK customers by mail order from the Channel Islands, on 1 April 2012 in a move that struck a blow to fulfilment companies operating in the Channel Islands, with job losses and company relocations.
Among those affected was Jersey Choice Limited – a Jersey-registered company growing horticultural products locally and selling them to customers in the UK by mail order.
Claim Jersey and Guernsey “unjustifiably treated… differently”
Claiming that its losses following LVCR removal amounted to more than £15m and that the Channel Islands had been treated unfairly, Jersey Choice Limited issued proceedings against His Majesty’s Treasury, which is responsible for UK taxation policy.
Pictured: Jersey Choice primarily sells flowers, plant gifts, collectables, bird feed, and bird care accessories to customers in the United Kingdom.
The company brought what’s known as a Francovich damages action against His Majesty’s Treasury – a principle of European Union law which requires damages to be paid where a member state breaches a rule of European Union law.
The claim was first brought in 2018, when the UK was still a member of the European Union.
Jersey Choice Limited claimed that Section 199(3) of the Finance Act 2012 “unjustifiably treated Jersey and Guernsey differently from the other third territories within the common customs area, contrary to the free movement of goods provisions in articles 28, 30 and 34 of the Treaty on the Functioning of the European Union”.
The High Court struck out the claim on the basis that it had no prospect of success and was also an abuse of process.
The Court of Appeal agreed that Jersey Choice Limited’s claim should be struck out on the basis that the pleadings disclosed no reasonable grounds, although did not not agree that it was an abuse of process.
Jersey Choice Limited then appealed to the Supreme Court, asking, was the Court of Appeal wrong to uphold the order striking out Jersey Choice Limited’s claim on the basis the pleadings disclosed no reasonable grounds?
“No reasonable grounds” for claim
Dismissing the appeal, Lord Lloyd-Jones, Justice of the Supreme Court, said: “The Supreme Court unanimously dismisses Jersey Choice’s appeal.
“The High Court and the Court of Appeal were right to conclude that Jersey Choice’s particulars of claim disclose no reasonable grounds for the claim.”
Pictured: Jersey Choice went though the High Court and the Court of Appeal, before appearing before the Supreme Court this week.
He explained that Jersey Choice’s primary ground for its claim is that when the United Kingdom imposed VAT on Low Value Goods imported from the Channel Islands, this amounted to a charge having effect equivalent to a customs duty – which is prohibited by the EU treaty provisions on the free movement of goods.
However, the Treasury argue that the VAT raised on goods imported from the Channel Islands was not a charge having effect equivalent to a customs duty because instead it amounted to internal taxation. Internal taxation falls to be assessed under the rules for the EU Fiscal Regime, not the EU Customs Regime.
Lord Lloyd-Jones said: “The lower courts found in favour of the Treasury on this point – we agree.”
The “two tests”
He explained: “For a measure to be characterised as equivalent to a customs duty, it must satisfy two tests. First, it must be shown that the charge affects only imported products – as opposed to internal taxation, which affects imported products and domestic products alike.
“Secondly, the measure must not be part of a general system of internal dues applicable systematically to categories of products according to objective criteria applied without regard to the origin of the products.”
The Supreme Court found that, in the present case, the charge of VAT on imports from the Channel Islands fails both tests.
Lord Lloyd-Jones explained: “As regards the first test, the mere fact that a charge is made because goods cross a border cannot of itself make it equivalent to a customs duty. Otherwise, all charges to VAT on importation would be equivalent to a customs duty. The charge arises because importation counts as a relevant transaction for the purposes of the VAT system – corresponding products supplied within the UK are subject to VAT in the same way.
“The charge also fails the second test because it is part of a general system of internal dues applicable systematically to categories of products according to objective criteria applied without regard to origin. VAT is a recognised turnover tax applied across the European Union. The provisions allowing member states to exempt Low Value Goods from VAT are found in the exemptions directive, which is undoubtedly a tax law.”
Why the Åland Islands but not Jersey?
Jersey Choice also claimed that the United Kingdom breached general principles of EU law by removing VAT relief for Low Value Imports from the Channel Islands, but leaving it in place for Low Value Imports from other territories.
WATCH: Lord Lloyd-Jones, Justice of the Supreme Court, dismisses Jersey Choice’s appeal.
The Jersey-based company compared the Channel Islands with other territories which fall within the EU Customs Union but are not subject to the EU rules on VAT governed by the VAT directive.
Jersey Choice used the example of the Åland Islands – an autonomous region of Finland which was still able to benefit from VAT relief for Low Value Imports into the United Kingdom after the relief was removed for the Channel Islands.
However, the Supreme Court also rejected this argument.
Lord Lloyd-Jones explained: “While the general principle of equal treatment applies in the field of taxation, that principle has no application to imports from third countries.
“The key question is whether Jersey should be treated as a third country or as a Member State in the context of the VAT directive. We hold that Jersey was a third country for the purpose of the VAT directive.
“The directive made clear that imports from the Channel Islands were to be treated as being from a third territory, not withstanding that the Channel Islands formed part of the Customs Union.
“This reflects the selective application of EU law to the Channel Islands as agreed in the Treaty of Accession of 1972, when the United Kingdom first joined what was then called the European Economic Community.”
He conclude: “For these reasons, Jersey Choice’s appeal is dismissed.”
Aidan O’Neill KC and Nicholas Gibson represented Jersey Choice Limited, instructed by CJ Jones Solicitors LLP.
Jessica Simor KC and Amy Mannion represented His Majesty’s Treasury, instructed by HMRC.