A recent First Tier Tribunal case which HMRC lost has created a lot of chatter in the industry. The tendency in these situations is for commentators to cherry-pick the snippets that make for a great headline.
As is always the case with these matters, the devil is in the detail.
The detail is a thirty-seven page legal document. Fear not. Here is a handy little summary for you.
The case involved Paragon Customers Communications Ltd (‘Paragon’) and supplies made to their customer Direct Line Insurance Services (‘DLIS’). The supplies were limited to two matters:
- The supply of printed mail packs and postage
- The supply of “personalised booklets”
Paragon treated the above supplies as a single supply of zero rated goods. HMRC contended that they were a single supply of standard rated services. Further, HMRC contended that the packs were not zero-rated because Paragon had incorrectly determined the VAT liability of the printed matter.
HMRC’s stance in this case is consistent with the revised guidance they published in 2015. VAT Notice 700/24: postage, delivery services and direct marketing.
They were following the policy outlined in Paragraph 3.3 Direct Marketing. This essentially says that when printed matter and certain services (e.g. postage) are provided as a single supply, it is no longer a supply of goods, but of services.
This revised guidance has been the subject of much industry commentary both prior to and after publication. It is this policy which has driven much change in the industry regarding how postage and other services are procured. For example, the increased use of Royal Mail agency agreements.
The tribunal findings
In considering the nature of the supply, the Tax Tribunal decided that this contract was a single supply of goods. They decided that ‘receiving and confirming data, printing, stapling and enveloping’ were ancillary elements necessary to produce the finished printed matter.
In other words they disagreed with elements of HMRC’s current policy regarding the supply of printed matter and certain services, notably postage.
The Tax Tribunal said this was an ‘incidental expense’ and formed a single supply with the print. However the Tax Tribunal went on to say there was a ‘fine line’ between this and postage being a separate supply.
It is important to recognise that the supply of print and postage was specific to a contract which Paragon had with DLIS for “on demand” fulfilment. The mailpacks were produced in relatively small quantities on a daily basis in response to the receipt of customer data.
This is distinct from bulk marketing mailings where the apportionment of cost between print and postage may be materially different. When postage is a significant proportion of the overall cost is it truly an ‘incidental’ charge for packing or transport? It is for the courts not us or HMRC to decide this.
What happens next?
First Tier Tax Tribunal decisions do not form precedents. The First Tier Tax Tribunal makes decisions on individual cases and endeavours to be consistent. There are numerous examples of it reaching different conclusions in cases which to us may look very similar.
Importantly, HMRC are free to regard this decision as an exception which does not apply to other suppliers. Alternatively they can try to overturn the ruling by appealing to the Upper Tribunal.
Paragon was represented by one of the UK’s leading VAT barristers. For HMRC, the decision about single sourcing print and postage flies in the face of current HMRC policy for direct marketing.
If neither side is willing to concede defeat until all court opportunities have been exhausted, there are likely to be several court cases to go before this matter is finally decided.
This case is not a green light to bundle postage and other services with print in order to zero rate the whole supply.
Feel free to contact us at any time. We’ll be glad to help.