In 2015 HMRC provided guidance for businesses who had incorrectly accounted for VAT on supplies of printed matter and postage. These terms were published by HMRC in Revenue and Customs Brief 10 2015. VAT Notice 700/24: postage, delivery charges and direct marketing, was also updated to reflect HMRC’s policy on supplies of printed matter and marketing services.
Recently it has come to our attention that some suppliers may still be incorrectly accounting for VAT on supplies of printed matter and postage.
According to their circumstances and the arrangements which they make, organisations are able to purchase VAT exempt postal services. The two ways in which this can be done are as follows:
1) Direct Access
Customers who meet the minimum requirements in terms of volume of mail and operating standards may contract directly with Royal Mail Wholesale and buy postage which is exempt from VAT.
2) Agency Agreements
An alternative method is for a customer to enter into a contractual arrangement with a licenced postal operator or intermediary (the agent), who themselves have a Direct Access Contract with Royal Mail Wholesale. In effect this is a tri-partite arrangement between Royal Mail wholesale, the agent and the customer.
- The agent invoices the customer for the upstream postal costs. “Upstream” refers to the cost of picking up the bulk mail from the mailing house and delivering it in to the Royal Mail’s inward mail centres. This is a VAT standard rated supply.
- Royal Mail invoices the customer for downstream postal costs. “Downstream” refers to processing mail in the inward mail centres, onward distribution to local postal sorting offices, and end delivery to individual households. This is a VAT exempt supply.
In summary, the agency agreement allows the customer to not pay VAT on the downstream costs. If the customer was to deal directly with Royal Mail for the services as a retail customer, they would be charged VAT. Organisations who are unable to reclaim part or all of their VAT costs, such as charities and financial institutions, find these the agency agreements an effective method to mitigate VAT on postal costs.
Suppliers with an agency agreement who are not the end customer
We are aware of a variation on the agency agreement arrangements where suppliers for example a printer, mailing house or agency, are the holders of the agency agreement.
The basis of these arrangements is as follows:
- The licensed postal operator will act as agent for the supplier
- The supplier signs an Agency Customer Contract
- Royal Mail invoice the supplier for downstream postal services, which are VAT exempt. The supplier pay these invoices.
- The licensed postal operator invoices the supplier for upstream postal services, which are VAT standard rated. The supplier pays these invoices.
- The supplier treats the downstream costs as a disbursement and passes them on to their own customer (e.g. a charity or financial institution) without charging VAT.
We are concerned that when doing this suppliers cannot comply with HMRC’s strict rules for disbursements.
The disbursement rules
The requirements to meet the VAT disbursement criteria are substantial and specific. It is incorrect to think that as long as the exact costs are passed on this will suffice. Instead several conditions must be complied with before HMRC will accept there is a disbursement.
The conditions that must be met for HMRC to accept that the charge from the agent to the principal can be treated as a disbursement (or pass-through cost) are;
- you paid the supplier on your customer’s behalf and acted as the agent of your customer
- your customer received, used or had the benefit of the goods or services you paid for on their behalf
- it was your customer’s responsibility to pay for the goods or services, not yours
- you had permission from your customer to make the payment
- your customer knew that the goods or services were from another supplier, not from you
- you show the costs separately on your invoice
- you pass on the exact amount of each cost to your customer when you invoice them
- the goods and services you paid for are in addition to the cost of your own services
HMRC has advised us that suppliers considering an agency agreement would not meet all the disbursement conditions. In particular HMRC noted who, according to an agency agreement, is liable to pay Royal Mail. This is the supplier rather than the ultimate client. In addition, the supplier would be acting as a principal and not an agent of its client.
Infringing HMRC’s strict disbursement rules
When HMRC do not accept that the downstream costs are a disbursement the financial consequences are potentially serious for any Member who uses an agency agreement for this purpose. HMRC will then regard this as not disbursement but as a supply of postage to the client. This is a standard rated supply of services to the client which when print is also supplied HMRC will categorise as a standard rated direct marketing service.
In an attempt to save a customer VAT on postage the member is exposed to VAT liabilities on both the postage and the print. Therefore we would strongly recommend you obtain professional advice before using agency agreements to treat postage costs as a disbursement. If you should require any further information please contact us.
