This has led to the practice of some larger firms opening warehouses on the Channel Islands. Items are transferred in bulk to the Islands before being re-packaged as orders for individual customers and sent back to the UK.
There is nothing illegal about the operation, which was first introduced to help Channel Island businesses sell flowers to the UK market. But some large firms have taken advantage of the loophole to sell a whole range of consumer goods.
Smaller firms have claimed that the practice places them under unfair pricing pressure, arguing that firms with the operational muscle to shift warehousing to the Channel Islands enjoy a 20 per cent cost advantage.
Richard Allen, from the Retailers Against VAT Abuse Schemes pressure group which submitted evidence to the European Commission, said: "The Commission are taking it seriously because this is a major distortion of competition within the Common Market where there is supposed to be a level playing field.
"And there certainly is not a level playing field on internet retailing in the UK. It's an internal market - it's supposed to be protected from this type of behaviour."
But the Treasury has now suggested that it is to investigate whether the Low Value Consignment Relief should cease.