HMRC’s policy directorate has recently caused consternation within the charitable sector over a letter sent to the Direct Marketing Association (“DMA”) in July 2014.
The letter sets out HMRC’s view that, where a supplier of otherwise zero-rated printed matter is also
responsible for providing the postage or delivery of that printed matter, the whole supply should be regarded as a taxable supply of marketing services.
This seems to be at odds with the long held view and the guidance set out in HMRC’s public notice 700/24, that postage and delivery costs should follow the VAT liability of the goods being delivered.
Many charities have traditionally engaged a single supplier to produce and deliver its printed matter in order to take advantage of this relief. The supplier is not required to charge VAT where the printed matter qualifies for zero-rating and this extends to the postage or delivery service as this is seen as an ancillary part of the main supply (in VAT parlance - a single composite supply of zero-rated delivered goods). This accepted practice has been of great benefit to charities in the past and even more so since April 2012 when the Royal
Mail’s supply of most bulk mailing services was taken out of exemption and became subject to VAT.
However, it now appears that HMRC’s latest view is that postage and delivery services are not ancillary to the supply of the goods but together compromise a single supply of marketing services which is taxable at the standard rate. HMRC appear to be making a distinction between goods that are posted or delivered directly to the purchaser and those where the purchaser requests that the goods are sent to the purchaser’s customer (or other recipients in the case of a charity’s marketing or mailing campaign). This change of policy would increase the cost of charity mailing by 20% and result in millions of pounds of irrecoverable VAT for the sector.
HMRC’s letter has been made public by the DMA and as a result the Charity Tax Group (“CTG”) is making representations to HMRC to seek an urgent clarification of the position. The CTG and other commentators believe that HMRC’s latest position is incorrect in law and is not in accordance with precedent EU case law that has sought to define what is a “single” or “multiple” supply.
Any requests from suppliers to change the zero-rating of delivered marketing material should be resisted for
now. However, it might be prudent to review any specific arrangements that are in place in order to determine whether the contract terms are stated to be VAT inclusive or exclusive. It’s unlikely that HMRC will seek to impose any changes retrospectively. However, with the long overdue updated guidance on the issue of single and multiple supplies due for release later this year, HMRC’s letter to the DMA might be a sign of what’s to come. If so, look forward to some interesting challenges ahead.
If you have any concerns over the VAT treatment of direct mailing, or indeed any other VAT matters, please contact Alan Pearce.