The UK Treasury has announced plans to close the controversial tax loophole that has allowed retailers to ship goods from the Channel Islands to the UK tax free.

Low Value Consignment Relief (LVCR) has enabled many companies, including online retailers Play.com and The Hut Group, to dodge tax on any goods priced under £15 shipped from the Channel Islands.

“These reforms will ensure that UK companies, especially small and medium sized enterprises, can compete on a level playing field with those larger companies with the resources to set up operations in the Channel Islands," said Exchequer Secretary of Treasury David Gauke.

"We are also protecting a significant amount of tax revenue. By making these changes, we are striking the best possible balance between the costs of collecting small amounts of VAT and protecting the interests of UK taxpayers and businesses."

A number of organisations have stepped forward to support the closure, including The Forum Of Private Businesses who says that it has been campaigning for years for the government to act on the loophole, which it believes has “destroyed livelihoods and caused much misery among the UK business community.”

A few of the companies who currently use the VAT loophole

“Virtually all the main players in the online industry mail CDs and other similar items like Blu-Ray discs from the Channel Islands to customers. This totally unfair loophole has allowed them to totally dominate the market and put thousands of small, independent traders out of business,” Jane Bennett, Head of Campaigns at the Forum, said.

Among the many low-cost goods shipped across to the UK that have avoided tax are CDs, beauty products, perfumes, printer cartridges and batteries. ASDA, Tesco, Dixons and WH Smith are just a few of the companies said to be affected.

Guernsey’s local economy is also set to be severely affected by the changes. “Guernsey’s fulfilment sector, which employs more than 600 people and generates more than £6m in direct taxes, has been heavily reliant on low value consignment relief to be competitive,” reports The Guernsey Press.

The closure of the VAT loophole will come into effect on April 1st, 2012 and will also apply to retailers in the Channel Islands, who will now be forced to charge VAT to UK mail order customers.