Royal Mail users to be hit with VAT on ‘certain’ postal services as a result of Budget
Businesses urged to consider retrospective VAT claims
Charities and not-for-profit organisations will be among those most likely to be hit by VAT charges on ‘certain’ postal services from 31 January 2011. Any other businesses which are unable to recover VAT in full will also be affected – notably those in the financial and insurance sectors. These changes, which will potentially cost thousands of pounds a year, were introduced as part of (the small print in) yesterday’s Budget.
This change has been on the cards since last year when the European Court of Justice ruled in a case brought by TNT Post that the VAT exemption for postal services should not apply to items of post that were subject to competition, i.e. essentially individually negotiated business post contracts.
“The ECJ ruling meant a number of organisations lodged retrospective VAT reclaims, but I would urge any business which fears they may be affected by the change to review their contract with the Royal Mail and seek a claim where appropriate. There could be thousands of pounds at stake – particularly for charities and not-for-profit organisations which frequently rely on the post to send out magazines and leaflets to help boost donations,” advised Hannah Dobson, tax director at Smith & Williamson, the accountancy and financial services group.
Further details below
Currently all postal services provided by Royal Mail are exempt from VAT, but this is set to change following the 2010 Budget.
A ruling from the European Court of Justice last year in a case brought by TNT Post confirmed that the VAT exemption for postal services should not apply to items of post that were subject to competition, i.e. essentially individually negotiated business post contracts. It has therefore been widely expected for some months that Royal Mail's business services, including those of Parcelforce, would become subject to VAT, albeit some thought at a possible reduced rate. This Budget has confirmed that VAT will actually be due at the standard rate (currently 17.5% ) from 31 January 2011 onwards on "certain postal services" of the Royal Mail.
HMRC have issued a technical note detailing what services they believe will be exempt and standard rated; those that are “individually negotiated” or not subject to any price and “regulatory control” will become liable to VAT at the standard rate. For the majority of individual consumers posting letters, there is unlikely to be any impact (subject to any price rises in the cost of stamps) unless they use services such as Parcelforce which is one of the services along with certain other business mail services that is to become subject to VAT. However, for charities, not for profit organisations, financial institutions and other entities that are unable to recover VAT in full, this could result in a significant additional cost to their businesses. In particular, the charity and non-profit sectors that encourage donations through letters and donation envelopes posted to households, this could result in a significant additional burden.
It was noticeable that the Budget was silent with regard to the historic VAT position of individually negotiated contracts with the Royal Mail. Given that it seems clear from the ECJ ruling in the case of TNT that these contracts should have always been subject to VAT, a number of businesses have lodged retrospective VAT reclaims with HMRC, arguing that the total price of these contracts should be taken to include VAT which should therefore be repaid. The historic position remains unclear at this stage, albeit HMRC seem to be taking a different stance on the claims lodged (unsurprisingly). Therefore, it would be wise for businesses to look at their contracts with the Royal Mail and seek advice on lodging retrospective claims.
For further information please contact:
PR queries:
Kate Harrison 020 7131 4228
Jess Koslow 020 7131 4264
Matt Rowe 020 7131 4550
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing about 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.