The industry has been awash with opinion, speculation and hearsay since HMRC’s announcement about their views on single sourcing. At some point you just need to step back and separate the facts from the fiction. A recent meeting of minds with 50 plus attendees representing charities, financial services, DM agency/print management, and ourselves as VAT taxation specialists, set about to do just that.
The sheer number of questions raised by the attendees highlighted the uncertainties, but more importantly, the misconceptions about the situation we are in and how best to deal with it. With this in mind we thought it would be useful to set out the facts so that informed judgements can be made.
With effect from the 2nd April 2012 price controls were removed for most Royal Mail products and services. This resulted in the products for which price controls were removed becoming liable for VAT at the standard rate. Since then organisations have looked at various methods to minimise the VAT exposure on postage supplies. This has led to an imbalance in the industry because some methods are more commercially effective than others.
The question is which method(s) are correct for VAT purposes?
- Direct Access
Customers who meet the minimum requirements in terms of volume of mail and operating standards can contract directly with Royal Mail Wholesale. Since many of Royal Mail’s wholesale services are VAT exempt the customer does not incur VAT.
- Agency Agreements
Customers enter in to a contract with a licensed postal operator or intermediary (the agent). The agent deals with the Royal Mail on behalf of the customer but Royal Mail invoice the customer directly for the downstream costs which are exempt from VAT. The customer only pays VAT on the agent’s upstream costs.
- Single Sourcing
The logic applied is that if a mail pack is zero rated then the postage follows the same VAT liability i.e. there is a single supply of zero rated goods. The corollary is that if the mail pack is standard rated then so too is the postage
There are three possible opinions/outcomes about how the supply of print and postage could be determined for VAT purposes:
1. There is a single supply of goods. This is the opinion held by those who advocate the single sourcing method.
2. There are two supplies. One of printed goods. One of postal services.
3. There is a single supply of services. This is HMRC’s policy.
Much confusion abounds about how HMRC may rule that print and postage is a single supply of services. The default position for those advocating it is a single supply of goods is to refer to HMRC’s published notices on postage and delivery. Does this cover the “single source” of a mailing campaign which includes postage to the end recipient? The challenge we have put to ourselves and to those who say it does is that if there is confidence that HMRC’s guidance in section 2 of VAT Notice 700/24 covers ‘single sourcing’ as it has been practiced for direct mail campaigns, please show us unequivocal confirmation from HMRC that it does or the court decision or some other legal guidance confirming this. No one ever has.
Ultimately all these opinions count for nothing because tax laws are passed by Parliament and interpreted by judges. The ultimate and conclusive opinion is that of the judges who rule on tax disputes. To date these judges have not considered whether the law dealing with how to account for VAT on delivery charges applies to posting mail packs.
For this reason the industry needs clarity from HMRC so that everyone can operate on a level playing field. The DMA wrote to HMRC in February 2013 to seek this clarification but HMRC’s Policy Unit did not reply until July 2014. In their reply and subsequently HMRC have said as follows:
16 July 2014 – “If postal services are provided in addition to the printed matter itself then the supply is not a composite supply of goods to your customer, but is a supply of services as the “goods” are sent direct to the recipient rather than your customer…postage is not ancillary to the printed matter because the nature of the supply has changed and so it cannot take the same VAT liability.”
22 Sep 2014 – “ …. (HMRC’s) position is that where a supplier is required to analyse or organise customers’ details, or is responsible for posting and distributing the marketing packs in addition to printing the material itself, this is a single supply of services, and not simply a zero-rated supply of printed matter including delivery services… The overall supply is properly regarded as one of marketing or direct mailing services, rather than a supply of printed matter with ancillary supplies. HMRC policy on this can be found in Notice 700/24 Postage and Delivery Charges paragraph 3.4…’
30 Sep 2014 ‘’… Paragraph 3.4 of the notice (700/24) makes it clear that if the conditions for disbursements (listed in paragraph 3.3) are not fully met then the mailing charges (i.e. the postage) are part of an overall supply which will normally be standard-rated…. “…Leaving aside postal services, if someone is making a supply involving printed matter we have to consider exactly what is being provided…. If the other services are artwork, design or similar leading to the supply of printed matter then HMRC would generally accept that this is a zero-rated supply of printed matter. However, if the other services include activities such as data handling, data management/processing, targeting of potential customers, distribution, media inserts, response recording and analysis, follow up to responses and similar then the essential features are likely to show that it is more than a supply of printed matter….’
All we can do is take decisions based on what we know. What we now know is HMRC’s policy and it would seem rather foolish to ignore it, whatever your view is. The consequences of ignoring HMRC’s view can be significant. In the event of a VAT inspection HMRC will bill the business (not the client) operating the ‘single source’ model for VAT arrears. This can be challenged but it will mean appealing to the Tax Tribunals. This is a slow and expensive process involving lawyers.
Myths and truths
Much discussion and debate will continue to do the rounds on the internet and social media about the implications of the recent HMRC announcements and what it means. There has been a lot of myth, spin and mis-information put out so here are the plain facts:
Myth: HMRC cannot introduce a new policy without consulting the industry.
Truth: HMRC can say this is not a new policy but merely confirmation of one that already existed. This is in fact the first time they have publicly stated their view on the matter but that doesn’t mean it is a new policy.
Myth: HMRC have introduced new laws governing single sourcing.
Truth: There have been no changes in the law or published guidance relating to single sourcing.
Myth: The letters from HMRC are just the opinion of one person and don’t carry any weight.
Truth: The letters were signed by one person on behalf of high level civil servants who have communicated HMRC’s policy
Myth: Businesses will not be penalised retrospectively for misinterpreting HMRC guidance.
Truth: The correspondence from HMRC states that ‘we will consider each case on its merits including the specific circumstances where direct marketing services may have been incorrectly zero rated, but only to the extent that they include printed matter that would be zero-rated if it had been supplied separately from the other elements of the overall supply of services. We do however expect these supplies to be treated correctly from 1 October 2014.’ In our opinion what this means is that HMRC may consider waiving the VAT due on the printed matter element of the supply (if the individual circumstances merit this) but that VAT will still be payable on the connected supplies such as postage.
Myth: HMRC will apply an amnesty for all suppliers caught in this situation.
Truth: HMRC have no basis in law to waive VAT which is due. They have a legal obligation to ‘collect the correct amount of tax…and… limited powers to decide to do otherwise’. In practice this means looking at individual cases and considering each case on it own merits.
Myth: We (a supplier) have a written clearance from HMRC which confirms we can zero rate postage. We are therefore immune from any VAT liabilities.
Truth: The letter may help your case because you acted in good faith on the basis of information received from HMRC. However, HMRC could renege on their ruling if they believe there are any material facts which were not made available to them.
Myth: My supplier says he will indemnify me against any VAT liabilities.
Truth: Does this mean they have a bottomless pit of cash ready to give to HMRC? What does your contract or terms and conditions say? Are you sure if things hit the fan that your supplier will really cover the cost?
Myth: This is great news for charities. If print and postage is a single supply of marketing services then it can be zero rated under the scope of Charity advertising relief.
Truth: Charity advertising relief does not extend to targeted individuals or groups. For this reason, direct mail and other targeted mediums such as email marketing are specifically excluded from the relief.
Myth: The package test is now obsolete.
Truth: The announcement by HMRC has nothing to do with the package test. The package test remains unaffected.
At the end of the day you need to protect your business. Seek professional advice and consider your options. In the meantime, we, and others will continue to press for further clarification from HMRC.