The DMA say it will now lobby the Treasury and the Department for Business, Innovation and Skills (BIS) to prevent HMRC from imposing backdated VAT charges and penalty fines for businesses while the industry was waiting for guidance.

It says it is concerned that if businesses are penalised for the two years when they did not pay VAT, some could end up passing the cost onto their charity clients.

In April 2012 a change in regulations meant bulk postal deliveries lost their VAT-exempt status. Direct contracts for postal services between charities or financial services companies and Royal Mail were unaffected, including Downstream Access contracts which continue to be exempt from VAT

However, some advertising mail suppliers have used the practice of ‘single sourcing’ – combining postage costs with production costs – for cutting out the VAT liabilities for financial services businesses and charities, which are unable to claim back or charge VAT.

For the past two years the DMA has been calling on HMRC to issue clear guidance on whether it will exempt single-sourced advertising mail from VAT charges.

The DMA is now concerned that supplier businesses that were advised to interpret the rules in this way could now be hit with large back-dated VAT bills, as well as penalties, after receiving a letter from HMRC last month. 

Mike Lordan, the DMA’s director of external affairs, said: 'While we’ve advised businesses to take a cautious approach, the ambiguity surrounding the rules means that many businesses have interpreted the rules differently. Until now, HMRC has not issued guidance to the contrary. HMRC created this vacuum so it would be extremely unfair for them now to penalise companies.'

Lordan said that the DMA wrote to HMRC at the time of the rule change in 2012 asking for clarification on the ‘single source’ issue and the association had since written ‘six or seven’ times more asking for a response.

‘We finally got a response from HMRC on July 16, which does at least make clear that single sourcing will be subject to VAT, but it’s appalling that it’s taken so long for them to reply. And there are still one or two parts of the process where we would like  more clarification,’ Lordan said.

One issue which the DMA says is still not clear is the VAT status of Royal Mail’s mailsort services used by suppliers of advertising mail.

The association points out that companies are able to print direct marketing materials for charities which are zero-rated for VAT, but these cannot be distributed unless they are passed to the mailsort service, which is potentially VAT-rated.

The DMA will write to ministers and HMRC asking for this to be clarified.