The Channel Islands are situated in the Bay of St. Malo off the Northwest coast of France and comprise of the Bailiwick of Guernsey (Guernsey, Alderney, Sark and Herm) and the Bailiwick of Jersey. They are self-governing Crown dependency with their own legislative assemblies, systems of local administration and laws and their own courts. Matters concerning defence and international relations, including relations with the European Union are the responsibility of the British Government.
The Bailiwick of Guernsey is not part of the European Union ("EU"); it has a special relationship with the EU that is governed by Protocol 3 to the UK Act of Accession in 1973. Under Protocol 3, Guernsey is part of the EU Customs Union and is able to trade in goods and agricultural products as if it were part of the EU, without any Customs charges being levied. This means that trade is unrestricted by tariffs, quotas or other barriers (except VAT). Any traded products must meet the relevant standards and environmental requirements of the EU.
Whilst this means that Guernsey is "within" the EU for most of the purposes of the free movement of goods it is outside the EU for other purposes, in particular non-customs related fiscal matters. As such VAT is not applicable on goods in the Islands, however goods sent from the Islands to an EU country are subject to any applicable VAT charges on arrival in that country.