Focus on postal services and VAT

From 2 April 2012 many postal services from Royal Mail and other suppliers will become liable for VAT. While there is still some uncertainty as to which services might remain exempt, if you use Royal Mail products (other than 1st and 2nd class stamped or metered mail) then VAT will be added to your invoices from Royal Mail. Read on to find out why this change to VAT liability is happening, what it means for your business and how to limit its impact.

Background to Royal Mail changes to VAT pricing
A few years ago when Royal Mail was the only supplier of postal services everything used to be straightforward and simple – postal services were exempt from VAT.

When the first competitors appeared around eight years ago, this all changed. They found that they were at a disadvantage because they had to add VAT to their prices but if users purchased the same service from Royal Mail it was VAT exempt.

Royal Mail’s competitors quickly found a “fix” to resolve the problem by creating “agency agreements” where the customer is only charged VAT on the difference between what the supplier pays Royal Mail and what they charge the customer (ie their margin) which is typically only a few pence.

Royal Mail’s VAT-exempt status challenged
Although agency agreements provided a short-term solution, competitors challenged Royal Mail’s VAT exempt status in the courts, arguing that it was inconsistent with EU law and that the exemption should apply to all postal operators or to none. The UK courts referred the case to the European Court of Justice who provided a ruling in 2010 about what services should remain exempt from VAT.

Unfortunately, the ruling still left a lot of uncertainty and depended on interpretation by each Member State. In the UK, HMRC issued a guidance note that explained its interpretation stating that all products in the “Universal Service” (eg stamps, metered mail, etc) would remain exempt as would those products that were subject to regulation and price control. In practice, since most of Royal Mail’s products were subject to price control this interpretation had a minimal impact on most users although some products – for instance door drops – did become liable for VAT in 2011.

Ofcom and price controls
When postal regulation moved to Ofcom in October last year it resulted in proposals to radically change the nature and scope of regulation to allow Royal Mail more commercial freedom. As part of those proposals, Royal Mail would no longer be subject to any price controls except for a control of the price of 2nd Class stamps. The proposals also included some safeguards to protect Royal Mail’s competitors from margin squeeze – in other words a form of price control – on some products.

The result of these changes in regulation mean that many Royal Mail services – certainly all bulk mail services – will become liable for VAT from 2 April 2012 whereas the VAT liability for their competitors remains unchanged. Unfortunately HMRC won’t give a definitive ruling until Ofcom announces its final decision on the regulatory framework from April (expected early March) but we have produced a guide to VAT liabilities on postal services from 2 April 2012, based on our current knowledge.