Postage update: access agreements

Last month the High Court made a decision in a claim brought by Whistl UK (formerly TNT Post) against HMRC in respect of the scope of VAT exemption provided to Royal Mail.

The background to all this reaches back to a European Council Directive in 2006 which entitled “exemptions for certain activities in the public interest” including “the public postal services”. The issue has been about what Royal Mail products and services fall within the scope of this definition.

Back in April 2012 most of Royal Mail’s retail products and services had their VAT exemption removed. This was itself the result of an earlier court challenge by Whistl UK (then TNT Post).

Whistl UK contend further that the charges Royal Mail makes for its downstream access services should not be exempt from VAT because they do not form part of Royal Mail’s obligations as the Universal Service Provider and that therefore the UK authorities have applied the VAT exemption beyond its intended scope. HMRC on the other hand contend that the exemption is valid because Ofcom obliges Royal Mail to grant access to its delivery network and that this was only imposed on Royal Mail because it is the Universal Service Provider.

Whistl’s motivation for bringing this to court is that they would like to offer their own “end-to-end” postal services i.e. using their own network to deliver post to the final destination. Currently however they would have to charge VAT to customers for doing this and they argue that Royal Mail’s exemption is not conducive to fair competition and therefore not in the public interest. The counter argument is that by removing Royal Mail’s exemption this would threaten the overall sustainability of the Universal Service (even though access services are not part of it) which is also not in the public interest.

The High Court ruled that the UK authorities were correct to include access services within the scope of the VAT exemption. The outcome of this decision is of great significance to our industry. It is estimated that 20% of mail by volume is sent by organisations who cannot reclaim part of all of the VAT charged to them. This VAT burden is reduced significantly through the availability of direct and agency access agreements which allow the posting customers to benefit from Royal Mail’s VAT exemption. Had Whistl’s challenge prevailed this method of VAT mitigation would have been removed resulting in significant cost increases for posting mail for these customers.

This issue is very complex and multi-faceted. It is possible Whistl will appeal the decision and that the matter may be referred to the European Court of Justice. If this happens, the subsequent court procedures will take some considerable time (in the region of two years) which, without any unforeseen developments, safeguards for the medium term the access agreement as a method for mitigating VAT on postal charges.