The issue of how VAT should be accounted for on postage supplies has polarised the marketing industry ever since the VAT exemption on many of Royal Mail’s retail products was removed in April 2012. From that moment many businesses advocated that VAT on postage could be mitigated by “single sourcing”. The logic being that if a direct mail pack was zero rated then the postage would follow the same liability i.e. there was a single supply of zero rated goods.
From the outset we advised against this course of action to our clients, and to the wider industry through our website and by speaking publicly at trade body events. This was not a popular stance to take since the commercial attraction of the single sourcing “solution” was obvious. As there were no legal precedents nor published guidance to substantiate this approach we had to exercise caution and protect the interests of our clients. The availability of access agreements (either direct access or Schedule 17) meant that with the proper arrangements in place, VAT could be mitigated on a large element of postal costs in any case, without the risk associated with single sourcing.
Recently, HMRC have advised that they view the combined supply of print and postage for VAT purposes as a single supply of a “marketing service”. This means the total consideration is subject to standard rate VAT, both the print and the postage. This has very serious implications for any business that has been operating the single sourcing model.
In summary HMRC’s view is that when supplied by itself, qualifying printed matter may be zero rated. However if, as is often done in our industry, the printed matter is bundled to together with postage or ‘other services’ the outcome is a single supply of marketing services.
Clearly it would be ill advised for any business to continue operating a single sourcing model for postage. What is not clear as yet is how HMRC will tackle the issue of retrospective action. They may make random visits to certain businesses and issue assessment notices for VAT which should have been charged but wasn’t. This will lead to some businesses facing large VAT bills going back a maximum of 4 years (this is the time limit for correcting VAT mistakes). Other businesses may avoid inspection until the 4 year time period has lapsed.
We are aware that in some cases suppliers have received written clearance from HMRC which appear to confirm that postage can be zero rated as part of a “single source contract”. This may be a basis upon which to appeal any retrospective liabilities which HMRC may seek to recover but this depends on how accurate and complete the information disclosed to HMRC was in the application for the clearance.
If you would like some further advice about this matter then please do not hesitate to contact us.