Direct mail suppliers spared âhundreds of millions in retrospective VAT penaltiesâ as DMA brokers HMRC agreement

Companies currently using so-called ‘single sourcing’ for mitigating VAT liabilities on direct mail print and distribution will not be subject to retrospective fines – potentially running into the hundreds of millions of pounds - when new HMRC guidance is introduced on 1 April 2015, following an agreement in principle brokered by the DMA and Charity Tax Group.

HMRC’s commitment to introducing comprehensive guidance on the VAT treatment of direct mail print and distribution in the new tax year will also clear up ambiguities surrounding the legitimacy of using ‘single sourcing’, as well as giving businesses time to apply necessary changes to existing contracts.

In April 2012, most mail services became liable for VAT, leading many suppliers to combine postage with print production costs as a ‘single supply’ of zero-rated print in order to mitigate the VAT liability for their clients. In the absence of firm guidance from HMRC over the past two and a half years, many suppliers have been using the practice in good faith.

However, in August the DMA warned the industry that it could be sitting on a ‘VAT time bomb’ when HMRC announced that many suppliers were incorrectly applying the guidance it had issued. This left many suppliers and their clients potentially facing retrospective penalties totalling hundreds of millions of pounds

Many financial services companies and charities also could have seen all their print and postage costs being subject to VAT and facing a 20% increase.

The agreement that has been reached with HMRC means that there will be no retrospective penalties for businesses who had misunderstood the guidance and that the industry has until 1 April 2015 to put in place alternative arrangements and contracts. Suppliers will still be able to mitigate the VAT on postage after 1 April for those clients – such as financial services or charities - who are unable to reclaim VAT through agency agreements and disbursement.

HMRC has also clarified exactly which additional services can be included as part of a supply of zero rated print and will be issuing revised guidance on this in the near future.

The DMA has lobbied the Treasury and the Department for Business, Innovation and Skills to prevent HMRC from imposing backdated VAT charges and penalty fines for businesses while the industry has awaited guidance.

Mike Lordan, the DMA’s director of external affairs, who led the discussions, welcomed HMRC’s agreement:

“Many businesses and charities can now breathe a sigh of relief that they won’t be facing any retrospective penalties - which could have run into the hundreds of millions of pounds - as a result of a genuine misunderstanding. We now also have the unambiguous guidance that we have been seeking that will allow all suppliers to compete on a level playing field.

“We’re pleased that HMRC has given the industry a realistic timescale to work to. It gives the sector breathing space to prepare for the changes without compromising their businesses.”

The DMA members worried about the impact of HMRC’s guidance on their advertising mail business can contact the DMA’s VAT helpdesk: dma.org.uk

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Notes to editors

Contact

Ed Owen, Head of PR
Tel. 020 7291 3324
Email ed.owen@dma.org.uk

Detailed guidance will be issued by HMRC before 1 April 2015. From that date, HMRC’s policy on advertising mail services will be as follows:

1. The printing of advertising mail packs will continue to enjoy zero-rating under the present rules when provided separately and the following will be regarded as part of a composite zero-rated supply
   1. The services necessary and essential for the preparation of the mail packs for mailing by a carrier
   2. All design and creative services prior to design and printing of a mail-pack.
2. The supply of all services that are advisory, planning and strategic will be standard-rated as a separate supply.
3. The supply of distribution services will be standard-rated if provided as a separate supply, and exempt if provided by Royal Mail as an agency disbursement for the charity under downstream access arrangements.
4. The printing and distribution of mail packs will be a standard-rated supply of direct marketing services when provided together as a composite supply under single-sourcing arrangements.