Jersey authorities are to limit the number of UK firms funnelling sales of CDs and DVDs through the island to take advantage of its tax exemption.

Many large UK retailers have channelled their orders through Jersey-based distribution companies in recent months under European legislation which exempts VAT from goods imported into the EU worth less than €22 (£14.60).

The move allows businesses to cut shipping prices on music and movies purchased through their web sites. The island distribution firms ship the orders free of VAT, driving consumer costs down to as little as £8.99 per CD.

But following complaints from small independent retailers, the Jersey government is looking to tighten the loophole when it is used by firms which do not benefit the local economy.

"We understand the UK government's concerns about UK-based companies avoiding VAT by channelling some of their products through Jersey. It is leading to a loss of revenue for the UK Exchequer," said Gerald Voisin, president of economic development for Jersey.

"The situation is also having a detrimental effect on our international reputation, which is based upon integrity and compliance with international standards."

Voisin said Jersey has the ability to curb this activity by revoking trading licenses firms are required to obtain before trading on the island. As Jersey is not in the EU, its legislation to curtail the practice would take precedence.

The Forum of Private Business (FPB) praised the Jersey government's campaign to rein in retail giants like Asda, Tesco and Boots, claiming the current business practice is crushing independent high-street shops.

"It is utterly absurd that retail giants should gain an unfair competitive advantage over small businesses by cynically exploiting the tax system," said FPB chief executive Nick Goulding. "Moreover, the Treasury is losing cash, an estimated £80 million a year, rising to £200 million in the next few years."

Mike Dillon, owner of the Record Factory in Paisley, went even further. "If the Jersey government is against new companies setting up in Jersey to exploit the loophole, it should be against those already there. All high street shops in the entertainment business are suffering because of this," he said.