Local firms that buy stock in the island will be exempt from the law

Several chain stores including Tesco and Asda have moved internet mail-order operations to the island to avoid VAT.

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

But Jersey's government says negative publicity hits the island's reputation.

Tesco has a separate website to deal with its Jersey sales

Economic Development Minister Philip Ozouf said businesses based in Jersey, that buy stock in Jersey and store it there before selling it, will still be able to operate.

Companies like play.com, which is based in Jersey, are thought to be unaffected.

But UK-based operations will have to apply for licences and they will be time limited to "gradually reduce and eventually discontinue their activities".

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

It is not economically beneficial to Jersey to any great extent and also undermines its business reputation Philip Ozouf

Mr Ozouf said: "We welcome and we want to see a continuing online retailing business which is properly established in Jersey.

"What we don't want to see is a UK business serving its UK customers by simply using Jersey as a post-box.

"It is not economically beneficial to Jersey to any great extent and also undermines its business reputation."

However, Nick Goulding, chief executive for The Forum of Private Business, which led objections to the loophole, called Jersey's move a "smokescreen".

And he warned retailers would switch to other low-tax bases such as Guernsey to sell CDs and DVDs into the UK market.

We are not objecting to competition from the internet, but consumers will recognise that if only one side has to pay tax, that just isn't fair Nick Goulding

He said: "To a certain extent we have been here before.

"Jersey put out a similar statement in November and they didn't follow through with it, so there's a lot of rehashing here.

"If the UK companies are pushed out, others will step into that space and we shall see a continuation of the problems, so we are concerned that the UK Government plugs it at this end."

He said buyers could be affected, but the long-term affect would be adverse on consumers.

He said: "It's a question of whether you want a sustainable market space with local stores and knowledgeable staff that you can talk to. Consumers value that.

"This kind of unfair competition means you are much less likely to have that.

"We are not objecting to competition from the internet, but consumers will recognise that if only one side has to pay tax, that just isn't fair."