Royal Mail's loss of VAT exemption 'won't affect direct mail'

by Noelle McElhatton, marketingdirectmag.co.uk 16-Nov-09, 12:42

LONDON - Royal Mail has been told that it will soon be forced to begin charging valued added tax (VAT) for many of its services, but not on direct mail because its delivery is price-controlled and subject to regulation.

The postal carrier has been told by HM Revenue & Customs (HMRC) of the decision on VAT, which follows a ruling by the European Court of Justice (ECJ) in a case brought by TNT Post.

Other postal service providers in the UK, including TNT Post, UK Mail and DHL, have to charge VAT at the standard rate.

But Royal Mail has, until now, defended the exemption on the basis that it has to provide the Universal Service, which its rivals do not.

TNT successfully challenged Royal Mail's exemption, on the grounds that it should not apply on commercial contracts subject to a competitive tendering process.

But Royal Mail's direct mail services - Mailsort 1, 2 and 3 - are price controlled and won't be subject to the HMRC ruling.

One postal consultant described the ruling as "disappointing for direct marketers".

"The HMRC proposal doesn't address certain Royal Mail products used by direct mail that are priced controlled, such as downstream access," said David Robottom, a consultant and former head of postal affairs at the DMA. "It's disappointing for the DM industry."

TNT argued that the VAT exemption, granted exclusively to Royal Mail in the UK under EU law as a publicly-owned postal carrier, was anti-competitive.

HMRC says it is "currently in discussions with Royal Mail to establish precisely which of their services will be affected"

Royal Mail would not comment on the VAT issue as "discussions with HMRC were continuing".

The Independent today quoted Madsen Pirie, the president of free-market think tank Adam Smith Institute, saying that Royal Mail's VAT exemption was anti-competitive.

"The Post Office is uniquely exempt from paying VAT on its services, as its would-be competitors have to," Pirie said. "This means that a rival has to be 15 per cent more efficient to compete effectively - most markets are won or lost on much smaller percentage margins than that."

Royal Mail's VAT exemption and other privileges, such as parking rights in urban areas, have been the target of criticism by competitors since the market was deregulated in 2003.