03 April 2020 - Article
There have been a couple of recent developments in the world of delivery.
The first involves the attempt by competitors to Royal Mail to challenge the exemption that Royal Mail applies to the ‘downstream delivery service’. This is the part of the delivery process that takes your parcel from the sorting office to your front door. This is distinct from the ‘upstream’ service which takes it from the post box (or depot) to the sorting office.
Royal Mail allows direct access to organisations that have enough mail to warrant it (usually quoted as £5,000 worth per annum) so that the exemption benefits the consumer. This is important for exempt sectors such as finance and charity. But the competing deliverers thought this unfair as it meant that their downstream service cannot compete fairly as they are not eligible to exempt services. So they argued that the downstream service is not the universal postal service (because it is not ‘end to end’) and thus ought to be taxed by Royal Mail.
But the Court did not uphold this view. The downstream service was more or less universal in terms of access and this meant that the exemption could fairly be applied. This is going to be very important, particularly because of the developments discussed immediately below.
A few weeks ago many of us were surprised and perturbed to learn about an ostensible volte face by HMRC concerning the VAT rules on direct mailing services. It had been assumed that, where printed material that is zero rated is delivered by the printer under a single contract, this means the entire service is zero rated as what is known as ‘delivered goods’. This is because the delivery is not so much a service to the distributor of the materials as simple transit of the goods that the customer has ordered.
But, under some pressure from the Direct Marketing Association to confirm that this was the case, HMRC said it was not. In more than one letter with various officials and a minister, the line taken was that printing, and even making the post packet ready for delivery in operational terms (which of necessity involves an element of pre-sorting) might be part of a zero rated supply, and that design of the products could also be included in the zero rate, but that the act of putting the packs in the post and recharging the delivery cost was not zero rated. Indeed, not only was that the contention, but HMRC said that the existence of a delivery element in the supply transformed the activity into a ‘marketing service’ which makes the entire supply standard rated.
In my view this is incorrect. The precedent of Plantiflor (a House of Lords decision) makes clear that delivery charges for goods that are sold is part of the sale price of the goods. This is not dependent on the goods being delivered only to the door step of the contractual customer. They can be delivered ‘to his order’, which is to say, to any location he specifies. Indeed HMRC’s Notice says as much. It says that delivery under this treatment can be made to a customer’s own customer. And, that is stated as being an example, not a restriction.
Where do we go from here? Well, if HMRC does not heed the strong comments of disagreement from senior consultants and the industry the result could well be a test case, which logic suggests ought to stop HMRC in its tracks. But litigation takes time and meanwhile HMRC has said that it will expect providers to account for VAT (from 1 October, though that date may or may not apply depending on negotiations). HMRC says it will be ‘sympathetic’ where arrears of VAT are in point, but even where there is sympathy, it will not be to the extent of allowing past delivery charges to remain zero rated. They intend to tax delivery even where they decide to be generous and not tax the product price element. It remains to be seen whether they hold to that line of ‘generosity’.
But, pending a successful test case against HMRC, the obvious solution (which HMRC neither denies nor challenges) will be for customers to ask the print house to access the postal system as their agent, not as a principal. This means that the above mentioned downstream service (some 90% of the cost) will be exempt from VAT. This will allow the zero rated printed material to remain zero rated. So, not much revenue gain, but achieved at a maximum of industry pain.