Founding A Business On A Loophole

Play.com serves as a warning for loophole-based businesses 

Play.com has announced that it is closing its retail division and switching to an eBay-style auction business model following the government’s efforts to close up the massive tax loophole sitting off the south coast that is the island of Jersey.

The shift in tax legislation means the end of the “low value consignment relief” loophole allowing for items of less than £15 to be sold to the UK VAT-free. This has rendered Play.com’s existing business model unprofitable and by the end of March, all 174 of its Jersey-based staff will be made redundant.

Play.com is not down for the count however and proves an excellent example of why it’s a good idea to have a contingency plan. The company was bought up in 2011 by Japanese online retail giant Rakuten for approximately £25m and has been operating with an eBay-like auction model and peer-to-peer trading hub alongside its regular online retail set up for some time now.

Either the company got lucky, or more likely identified that the opportunity in the market that it had been taking advantage of was unlikely to last forever. By looking far enough into the future, Play.com was able to develop a contingency plan to allow it to stay in business after the lucrative tax haven situation was closed up.

Treading the line

Nobody is saying that Play.com was up to something dodgy by basing itself on Jersey. Well, I’m not saying they were up to anything dodgy at least – I don’t think they were. The company might have upset its fair share of competitors, but they provided an excellent service to many satisfied customers. All the same, it’s obvious that a loophole that is open to manipulation in that manner for commercial purposes is unlikely to stick around for too long.

If you’ve identified an aspect of law that you can exploit for financial gain, there is a very strong chance that what you’re doing will either become impossible through patched legislation, or otherwise outlawed in the future.

Depending on the nature of the exploit, although extremely rare, there have been some cases where people can be found retroactively guilty of committing a crime even though at the time of committing it, it was not illegal. Admittedly this is normally for incidents approaching the level of war crimes, but the precedent is still there for companies to find themselves in substantial hot water over past actions. Even if you’re off the hook legally, publicity might not be so forgiving. Starbucks after all is still licking its PR wounds following its policies on paying corporation tax even though they didn’t do anything outright illegal.

Maximising your profit when establishing a business is crucial, but it is more important to always have an exit strategy if there is even a remote chance that the situation will change at any point in the future. A sense of morality will stop you from doing anything too stupid, but you should still be on the look out for potentially shaky ground. If you’re trying to be competitive, there’s a strong possibility that you’ll be doing something that’s at least partially risky.

A rolling stone messes up your business plan

Rules change and business models can become obsolete overnight, so make sure you can change your methods and still come out on top. Working for a provider of business insurance, I have learned that businesses should always be prepared for any setbacks they might suffer, but this wouldn’t help if the very foundation of your business was disrupted in this manner. If you feel you could have the corporate rug pulled out from under your feet, look for a way to diversify or you run the risk of your entire company toppling when the status quo comes crashing down.

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