The UK Treasury has confirmed that from 1 April next year it is ending LVCR for all goods imported into the UK from the Channel Islands.
Politicians and businesses are now looking into whether it discriminates against the Channel Islands because some other European countries will not be affected.
In a statement to Channel Television, Guernsey's government said: "The Policy Council and the Commerce and Employment Department are both extremely disappointed that the UK Government intends to lower the LVCR threshold to zero for goods coming from the Channel Islands. The announcement has been made after HM Treasury had sought advice from the European Commission."
Meanwhile, Senator Alan Maclean, Jersey's Economic Development Minister has expressed his disappointment over the announcement.
He says there has been work underway for some time on this issue. He said: "A ministerial task force, chaired by the Chief Minister, has been co-ordinating action across Government. It has been working on three complementary strategies: firstly, the political and potential legal engagement with the UK government over the policy decision itself; secondly, working with those in the industry to help retain fulfilment businesses operating in Jersey; and thirdly, the development of a contingency plan in case some jobs are lost as a result of the uncertainty over future arrangements for the industry.
"The change will affect hundreds of livelihoods across the Island and in view of this impact, we are taking legal advice in conjunction with members of industry. We would not want discrimination against the Channel Islands to go unquestioned when it has the potential for a severe impact on islanders."
LVCR is the system which allows companies here in the islands to sell goods to the UK VAT-free if they cost less than £15. The threshold was reduced from £18 to £15 earlier this month. It is something which has led to the creation of what is called the fulfilment industry - making the islands home to the likes of Moonpig and Play.com.
It means around 700 jobs in Guernsey and a similar number in Jersey could be affected. It raises the question of if there is no VAT loophole, will there be a fulfilment industry. Many of the companies involved say it can survive, arguing they are competitive with or without LVCR in place, but it being scrapped is already being welcomed by the Forum of Private Business in the UK.
It said: "The Channel Islands VAT loophole has over many years destroyed livelihoods and caused much misery among the UK business community. We are of course sympathetic to those Channel Island employees who may lose their jobs as a result."
The postal operator admits losing that sector would have a big impact on their business and the Head of Guernsey Post is criticising the UK Treasury for discriminating against the Channel Islands.
He says it makes no sense for the UK to scrap LVCR only in Guernsey and Jersey.
Charles Duncombe, is Director of www.tightsplease.co.uk, and he says his online company will be affected by the change. He said: "I feel sorry for the UK consumer and also the people in the channel islands whose jobs are now at risk. Prices are invariably going to rise and with the economy teetering on the edge of recession, anything which increases prices and slows demand could well prove to be a false economy."