Sainsbury's and Best Buy set up Channel Island websites to beat VAT on sales of CDs and DVDs

Sainsbury's and Best Buy set up Channel Island websites to beat VAT on sales of CDs and DVDsJ Sainsbury and US retail giant Best Buy have launched VAT-dodging CD and DVD websites ahead of the busy Christmas trading rush in the hope of cashing in on the booming popularity of online sales.

The pair are the latest blue-chip retailers to set up complex and circuitous shipping arrangements for goods offered on their websites for less than £18. By dispatching orders from the Channel Islands direct to customers' homes on the UK mainland, these transactions do not attract VAT under an arcane EU tax relief directive.

Other groups already pushing online CD, DVD and games sales through the Channel Islands to avoid VAT are Amazon, HMV, Tesco,, Asda and All are able to offer goods at VAT-free prices substantially cheaper than prices to be found in high street stores.

Two years ago the Treasury said lost VAT receipts from this trade were costing the taxpayer £110m a year and rising, though industry insiders suspect the figure is much larger. With VAT set to rise from 17.5% to 20% in the new year, the Channel Islands tax dodge is expected to balloon further.

In the three months to Christmas last year, one in three CDs were bought over the internet, according to market research firm Kantar. Almost all were bought for £18 or less.

Sainsbury's CD and DVD website, which is reached through the retailer's homepage and looks indistinguishable from the rest of Sainsbury's site, is operated by Aim-listed firm MBL Group, which is in takeover talks. It is thought the business could be taken private by chief executive Trevor Allan, who with his brother controls almost 30% of shares. The company did not mention its Guernsey operations when announcing to shareholders this month that it had struck a deal with Sainsbury.

Meanwhile, Best Buy has struck a deal with Channel Islands VAT-avoidance specialist firm to operate the CD and DVD section of its UK website, which launched last month. The same company offers similar services to the Barclay brothers, who last year bought from administrators, and to Asda, Dixons and Argos.

Founded by Matthew Moulding and John Gallemore, former executives within John Caudwell's mobile phone empire, the business hopes to float on the stock market early next year. Earlier this year it began offering other goods such as cheap handbags, sun cream and underwear through new sites, and

In its final years in power, the Labour government increasingly frowned on VAT-free internet sales via the Channel Islands but its claims to have curbed exploitation of the loophole look to have been premature.

In April, the now business secretary, Vince Cable, described big supermarkets exploiting Channel Islands CD and DVD sales tax loopholes as "extraordinary and seriously unwise". He said: "I am sure if they are sufficiently aware of the importance of their reputation in this area that they will stop it immediately".

As shadow chancellor George Osborne three years ago said: "The Conservatives intend to hold the government to account for the effect on domestic business if nothing is done."

Best Buy and MBL were unavailable for comment. Sainsbury's said: "Sainsbury's new entertainment website is a perfectly legitimate and increasingly popular shopping option for our customers, who appreciate the convenience, choice and value offered online."

Powered by article was written by Simon Bowers, for The Observer on Sunday 21st November 2010 00.10 Europe/London © Guardian News and Media Limited 2010