The issue of Low Value Consignment Relief - a tax mechanism that permits retailers to use distribution centres in the Channel Islands to sell goods under the value of £18 into the UK without paying VAT - has long been a bugbear of music retailers, who feel it allows online stores to sell CDs for artificially low prices.
Their fears became all the more pronounced after the Government raised VAT from 17.5% to 20% at the start of the year.
While the previous Labour government often made noises about closing the loophole to little effect, Treasury minister Lord Sassoon told the House Of Lords yesterday the Government is "actively reviewing the operation of this relief".
"Ministers hope to be in a position to announce any possible changes to the operation of LVCR flowing from the review in the Budget on March 23," he explained.
Sassoon made the announcement after the Conservative Lord Lucas asked the Government to assess the annual cost of LVCR- originally set up to protect flower growers in the Channel Islands - to the Exchequer.
Sasson said the latest estimate was £130m for 2010, reduced from the previous estimate of £140m.
Lucas said he found the figure "mildly unbelievable since the turnover of the largest company involved in this scam is around £500m - and that is just one of them - on which we lose around £100 million a year".
"Does my noble friend agree that what started out as a quite reasonable relief for Channel Islands flower growers has now been abused to the point where it has destroyed whole industries in the UK?" he said.
"You can no longer on the internet retail records, computer memory, contact lenses or gifts. It is ever expanding and costing us thousands of jobs and, as the Minister says, hundreds of millions of pounds. Has not the time come to put a stop to it?"
Sassoon said LVCR was not a "scam" but instead came from the fact the Channel Island are treated as being outside the European Union for these purposes.
"The previous Government took steps with the Channel Islands authorities to encourage them to introduce a voluntary restraint and caps on the activities of individual firms in this area," Sassoon added.
"The issue relates not only to CDs and DVDs but to a whole range of goods. It is precisely because this is an important area and we want to make sure that the Exchequer is protected that Ministers are looking at what else we might do."
And he revealed the loss to the Exchequer from LVCR has increased by around 50% over the past five years.
Malcolm Allen, owner of Malcolm's Musicland in Chorley, who has long called for action on LVCR, said all physical music retailers in the UK would benefit from closing this loophole.
"If we all had a level playing field it would be a bit better [for music retail]," he said. "We are all at a disadvantage because of this 20%. It would help us all. People perceive that we are overcharging them."
Allen said HMV - which yesterday announced that it would not make its profit forecast for its current financial year - would also profit.
HMV operates a fulfilment centre from Guernsey, which means it benefits from LVCR, but Allen said HMV had been forced into this as a result of its competitors' actions.
"If you had a level playing field HMV wouldn't be in the trouble they are," Allen said.
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