HMRC stance on direct mail VAT threatens charities

charity VAT

The Charity Tax Group (CTG) is seeking urgent clarity over the taxman’s stance on VAT treatment of direct mail that relates to charities, indicating it believes that HMRC’s position is in contradiction of existing guidance and practice and would leave massive VAT charges – of up to £700,000 in one instance

The CTG said that the implication would be grave for charities that have engaged in single sourcing since 2012 – one large charity, it said could be hit with a VAT charge as high as £700,000.

The chairman of the group, John Hemming – who is also head of tax at the Welcome Trust – has said that while advice was sought from HMRC when VAT was first introduced on Royal Mail bulk mailings, it has only been available now.

‘If this was known to be HMRC’s position, charities could have arranged their affairs to mitigate the increased VAT cost.

‘Given these circumstances, the possibility of a retrospective VAT charge becomes even more unreasonable and it is surely not the intention of the government to penalise the sector in such a way – a point that I may need to raise at my meeting with the Minister responsible for charity taxation, Priti Patel MP, on16 September,’ Hemming has told HMRC in a letter.

Hemming has taken up the matter after it was first raised by the Direct Marketing Association (DMA) last month, over concerns that companies that specialise in supplying bulk deliveries of advertising mail to financial services businesses and charities could face a VAT time bomb as a result of HMRC’s delays in issuing guidance on how the VAT rules operate.

In particular, new rules now mean that postage on direct mail can no longer be considered zero-rated, affecting charities due the VAT status of Royal Mail’s mailsort services.

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.

In a response to the DMA, HMRC said that the function of the direct marketing campaign is to send out the promotional material so the postage element is at least as important as the printed matter element.

‘This is the reason that the 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. As this supply does not fall within the zero or reduced rate, the whole supply must be taxed at the standard rate of VAT,’ HMRC told the DMA in a response letter.

But the CTG disagrees with this, saying that the position contradicts ‘what charities regard as the accepted interpretation of the existing VAT rules.’

‘We are aware that many charities have entered into contracts that include postage as the ancillary element in a single-source zero rated supply, and that these arrangements have been approved and endorsed by HMRC’s written enquiries team.

This position also contradicts HMRC’s published guidance, which states that VAT is not charged separately for delivery where that cost is absorbed in the cost of the product,’ Hemming said.

Hemming further cited case law as well as s8.3 of the VAT guide, which is more explicit about the zero rating issue.

‘Based on this plain reading of the guidance we do not see how HMRC can pre-empt the process of detailed analysis of whether there is a single or multiple supply and, if single/composite, its nature and liability – as your letter appears to do.

‘You appear now to be adopting a new policy which in effect takes the default position that a postal element in a supply of printed matter will always change the nature of the composite supply so that it becomes a composite supply of standard rated marketing services rather than of zero rated delivered goods.

‘This seems to be based largely on an argument that the postal element cannot be ancillary because of its relatively high value and because it is seen as equally essential to the overall aim of the contract,’ said Hemming.

The CTG has proposed a meeting with HMRC to air the issue more thoroughly.

‘We do not believe it is satisfactory for VAT advice that deviates from the guidance and equates to new HMRC policy to be shared in this way, given the potential for panic and confusion. Clarity is  urgently required in order to remove the uncertainty that charities are facing. Most importantly, we seek urgent assurances that no retrospective claims will be made against charities,’ said Hemming.

An HMRC spokesman said that after changes in 2012  in the VAT liability of certain postal services (as a result of a European Court decision), some members of Direct Marketing Association (DMA) ceased delivering printed matter to their customers to post themselves and instead posted the printed matter on their customers behalf.  

 'HMRC consider that this change in supply by DMA members is one of 'direct mailing' which is the posting of their customers mail, for example publicity, advertising material or promotional goods.  Such services are VAT standard rated (20% VAT). There has been no change in policy by HMRC, and their views are reflected at para 3.4 of Public Notice 700/24 Postage and Delivery Charges (2003 being the latest version).

 'Any retrospective charges where VAT has not been applied correctly would fall to the marketing company and not their customer. 

'While the published information is correct we will consider each case on its own merits including specific circumstances where direct marketing services may have been incorrectly zero-rated, but only to the extent that they include printed matter that may be separately zero-rated,' HMRC said. 

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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