Large businesses that exploit VAT loopholes by distributing goods from Jersey are to have their licences stopped in a year.

Several chain stores have moved internet mail-order operations to the island to avoid VAT.

Many believe the practice has had negative impacts on smaller retailers in the UK.

The Channel Islands are in the EU for Customs purposes and outside it for VAT. Goods sent from the Channel Islands to the UK are regarded as being imported and VAT is generally due on imports. However, if the value of the package is less than approximately £18, VAT is not required.

This loophole is being exploited by a host of retail giants to sell goods, such as contacts lenses, CDs, DVDs and computer games back to the UK from websites. These goods are then posted from the Channel Isles to UK customers.

But Jersey's government said negative publicity had hit the island's reputation.

Economic Development Minister Philip Ozouf said businesses based in Jersey, that buy stock in Jersey and store it there before selling it, will still be able to operate.

But UK-based operations will have to apply for licences and they will be time-limited to "gradually reduce and eventually discontinue their activities".

It was claimed during a debate in Parliament that the Treasury was losing £80 million a year from retailers operating "offshore" and this could reach £200 million as more businesses took advantage of the loophole.

However, Nick Goulding, chief executive for the Forum of Private Business, which led objections to the loophole, said the move did not go far enough.

"Although this announcement is a tremendous step - providing it happens - much of the problem will remain," he said. "Businesses based in Jersey, like Play.com, will still be able to exploit the loophole.

"Furthermore, there has been no commitment from the Guernsey government to stop the practice there and HMV is reportedly selling 100,000 CDs a week to the UK from Guernsey."

Mr Goulding said unless the UK Government acted against the loophole, high street shops would continue to be fatally undermined.

"The FPB again makes a plea to the Chancellor and his Paymaster General Dawn Primarolo, who we know is taking a close interest in this, to act decisively at the Budget," he said. "Failure to do so will result in independent music shops, opticians and health food suppliers going bust."

Last week Birmingham-based optician Dollond & Aitchison lost a European court case to distribute VAT-free contact lens packages from Jersey to consumers in the UK.

The European Court of Justice ruled the cost of eye tests should be included in the package, taking the total over £18, making D&A eligible for VAT. D&A, which employs 150 at its headquarters in Aston Science Park, said it was "clearly disappointed" with the decision, but that it had not had a financial impact on the company. ..SUPL: