Improper channels
VAT dodging , Issue 1658 HUMBLE businessman Richard Allen saved taxpayers billions of pounds when he spotted a Channel Islands export-import scam being used by major retailers to avoid VAT.

He could have saved a few million more – but HM Revenue & Customs (HMRC) inexplicably buried his meticulously gathered evidence, allowing the illegal tax evasion to continue for another six years.

Having spent years trying to silence him, HMRC would later unabashedly call on him to help close down a similar racket he had helped expose, being used by Chinese importers.

Instead of giving him the reward that was initially offered, however, the tax office almost bankrupted him when it won an order for the £125,000 costs it had accrued fighting his campaign – including eye-watering legal bills for barristers employed to block his freedom of information requests.

End of the road
Now, his last chance of holding HMRC and the Treasury to account for their bizarre conduct over 20 years has been kiboshed after both the adjudicator and the Parliamentary and Health Services Ombudsman (PHSO) said it was beyond their remits.

Allen told the Eye: "My complaint was fully evidenced. It included HMRC officials permitting the VAT losses, misleading ministers, silencing those trying to expose their conduct and falsely blaming government policy. HMRC also denied me a reward that they offered and paid to colleagues who had jointly ended the abuse. Yet nobody will properly investigate it, let alone hold anyone accountable."

The £43.3m-a-year PHSO fully upholds just 2 percent of complaints. It rejected Allen's complaint, claiming it was a matter for MPs and the legislative process – and declared that the decision not to give him the promised reward was fair, but refused to say how it had come to that conclusion, citing confidentiality.

"The report looked like it had been written by HMRC, with their terminology," he said. "I have no trust in its independence, and what is the point of the PHSO if not to investigate complaints about departmental conduct?"

Disc world
Allen's case appeared to be cut and dried. In 2005, his mail-order business, selling niche collectable CDs, was offered a route to avoid VAT by abusing Low Value Consignment Relief (LVCR) that exempted items below £18 from VAT when shipped via the Channel Islands.

The dodge could have upped his margins by as much as 20 percent. Instead, he tested the system, realised it worked, then took a dossier of evidence to the tax office – which declined his offer of a full investigation and buried it.

Tesco and Amazon initially complained to the Treasury about the practice in 2004 after the now forgotten Play.com was the first to exploit it. When the government denied the trade was abusive – having been misled by officials, Allen claims – they took it as a green light to get stuck in, as did Boots, Asda, WHSmith, HMV and others (Eye 1267).

Circular argument
The scam utilised a practice known as "circular shipping", where goods were sent to the islands only to be sent back to UK customers the following day. Allen noted an entire shipment of Take That albums once missed its release date due to bad weather in the Channel. Orders for multiple CDs were sent individually to ensure the VAT exemption applied, resulting in losses of up to £250m per year in VAT.

Allen was unable to stir the UK government into action, despite the efforts of then financial secretary to the Treasury Sir Stephen Timms. He then went to the EU Commission, which deemed circular shipping to be an abuse under a ruling that, ironically, had been won by HMRC in 2006, the year Allen complained.

The trade was finally shut down in 2011, under threat of EU infraction proceedings (Eye 1303). By then thousands of VAT-paying smaller companies, including Allen's, had gone under, unable to compete.

Costly defeat
Allen took HMRC to court in 2019 over his lost earnings and tried to claim a breach of his rights under the EU VAT directive, but he lost. It was then that he was ordered to pay the HMRC's £125,000 costs, reduced to £10,000 after publicity around the case.

"I did get hold of incredible documentation through disclosure, including advice notes to ministers which showed officials had misadvised ministers and misled parliament," he said. "Sadly, I am not allowed to share them."

A PHSO spokesperson said: "All of our investigations are conducted independently. We... could not look at the LVCR part of his complaint because the legislation that brought it to an end was outside of PHSO's remit." Allen said: "Totally missed the point of my complaint. Again."