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We are based in the UK where 20% VAT is due on all domestic sales. We offer shipping to the Channel Islands (Jersey/Guernsey) where tax should be zero rated. I have set up Jersey and Guernsey as separate countries with their own tax rate of 0%, if a customer correctly chooses Jersey/Guernsey as their shipping address then the correct rate of tax is applied.

However, the problem is that many customers in the Channel Islands select 'United Kingdom' as their country and enter Jersey/Guernsey as their state, UK VAT at 20% is then incorrectly applied. The same may apply to Gibraltar and a similar problem applies to the Canary Islands. There are legal and accounting implications with this, inevitably we occasionally fail to manually intercept these orders before they reach our business system, so we need to filter these orders by postal code, i.e. JE* and GY*. I've set this up in Sales -> Tax -> Manage Tax Zones & Rates but VAT for the United Kingdom continues to be applied regardless of the postal code.

Has anyone else been able to set postal codes up to apply the correct tax rate? Is it likely I've missed something in the Magento configuration settings? I've no idea where to start debugging this issue so I'd like to rule out configuration errors as a possibility before looking for a dev to help fix the problem.

Magento version is 1.9.0.1 CE with all SUPEE patches applied.

TIA for any suggestions.

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