The UK Treasury was losing �80m a year because of the VAT loophole

Stores including Tesco and Asda had moved internet operations to Jersey to avoid UK VAT on CDs and DVDs.

Jersey announced on Monday that their licences would be stopped in a year.

Deputy Minister for Commerce and Employment Carla McNulty-Bauer said Guernsey's priority was looking after "home-grown businesses".

Negative publicity

Jersey and the Bailiwick of Guernsey are direct dependencies of the British Crown. They are not incorporated into the United Kingdom, but do owe their allegiance to the reigning Sovereign.

The islands have their own governments, their own tax-raising powers and are not members of the European Union.

Under EU law, retailers operating out of the EU can sell products valued at less than �18 to customers in member states without charging VAT.

During a UK parliamentary debate in February it was stated that the UK Treasury was losing �80m a year from retailers operating "offshore" and that could soon reach �200m a year.

CDs are sold VAT-free because they are valued at less than �18

UK-based retailers said they had been unfairly undercut, but Jersey's government said negative publicity had hit the island's reputation.

Jersey has responded by asking those businesses to leave, but Deputy Minister McNaulty-Bauer said they would not be allowed to threaten Guernsey's existing mail order businesses by moving there.

She said: "Our priority is to ensure that our local, home-grown businesses that are Guernsey-friendly are looked after and given the best advantage possible.

"We do not want those companies to be prejudiced against in any way."