10 December 2018 - Article
In recent times VAT has been introduced on Royal Mail postal services apart from the ‘universal service’, which is a regulated price-controlled service open to all, irrespective of where in the UK they are situated. Special postal services, and price-negotiated postal services, are now subject to VAT. This puts Royal Mail in the same taxation position as competitors such as TNT.
The introduction of VAT has increased the tax burden on charities (as well as financial services and certain other exempt sectors). One aspect of Royal Mail service provision that had appeared to remain unchanged by this was their provision of part of the delivery process under a price regulated regime. This so called ‘downstream’ service is one which Royal Mail is required to provide whereby they complete a delivery which is initiated by a private company. The private company is able to collect the mail and deliver it to a ‘hub’ from which the Royal Mail will continue to deliver it to the door of the recipient. Since this is price-regulated, it is regarded by Royal Mail and by HMRC as part of the universal postal service and therefore exempt from VAT.
In theory, the exempt Royal Mail postal service is usually provided to the initial carrier (the provider of the ‘upstream’ service), whose sale of the combined delivery to his customer is fully taxable. On that basis there is no unfair competition as between Royal Mail and deliverers who provide the full ‘end-to-end’ delivery service as is commonly provided by operators such TNT. But it is possible to access the downstream Royal Mail service direct upon arranging delivery to the appropriate hub. This means that charities and other exempt sector bodies can arrange for part of the service to be provided by the upstream private company and part to be provided directly to them by Royal Mail on an exempt basis.
TNT has objected to this as creating unfair competition with its end-to-end service and has taken action in the High Court (judicial review). Whilst there are procedural reasons for this being a judicial review, the decision is most interesting for the comment that Judge Parker made concerning the possible application of the VAT law to downstream services provided by Royal Mail.
Having started from a position of accepting HMRC’s and Royal Mail’s case (to preserve the exemption), Justice Parker was increasingly persuaded by TNT that the matter was at least not clear. The Court of Justice of the EU’s earlier decision, concerning competition between the universal postal service and private operators, had not covered the question of a partial delivery service. There were certain ambiguities in the way it expressed itself (which is not an unusual problem with the European Court), and that therefore there was a matter that did need to be decided.
Whilst this was all that was required of the Judge in the narrow circumstances of a judicial review, he made a recommendation that the parties should agree to refer questions back to the Court of Justice in order to seek authoritative precedent on this important question.
Any charity that may take advantage of the current exempt status of the downstream service should bear in mind the possibility of that status being withdrawn from some date in the future. Whilst that should not affect current arrangements, it may be appropriate to budget future costs with the potential for VAT being added. In particular, any binding contractual arrangements will need to take into account this potential future liability.
It should be noted that in any case, many charitable users of the postal service are not disadvantaged by Royal Mail adding VAT. In particular, where a fulfilment house for a donation campaign delivers a zero-rated printed package to a mailing list of donors, the fact that they are charged VAT does not matter because they simply claim it back and do not charge it to the charity as part of the zero-rated delivery. For this reason, and for general reasons of logistics and the availability of the end-to-end universal service, the potential developments concerning downstream service provision may be of interest only to certain charities in certain specific circumstances.
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