Court ruling puts Royal Mail's VAT exemption under threat

With postal strikes set to cause nationwide disruption and the postmen showing no sign of backing down as Accountancy Age went to press, surely, you would think, it couldn’t get any worse for Royal Mail.

You may well be wrong. In the midst of the uproar over the planned industrial action, an HMRC brief emerged on its European Court of Justice battle with TNT Post over VAT on delivery services ­ and it looks like the decision could impact Royal Mail.

Historically, under EU law Royal Mail has been able to treat all its services as being exempt from VAT on the grounds that they are the “public postal service”. Other postal service providers in the UK have to charge VAT at the standard rate.

TNT’s legal challenge was that Royal Mail’s VAT exemption was not in accordance with EU law. The ECJ ruled that Royal Mail, as the operator providing the “public postal service”, was the only postal service provider in the UK that was eligible for the VAT exemption.

However, this exemption would not apply to supplies that had been individually negotiated by businesses with Royal Mail, as it “distorts competition”.

This causes another headache for the national mail service on a couple of fronts. Some businesses that have negotiated special contracts with Royal Mail had been encouraged to lodge claims against the organisation.

These would claim that they assumed the fees charged by Royal Mail included VAT, they paid it and are now entitled to have it back.

Furthermore, charging VAT on some Royal Mail services could increase costs for an organisation that only made a profit (albeit at 0.86% of turnover) for the first time in
20 years.

The HMRC brief, issued nearly six months after the ECJ decision, has stated that “in the meantime, all postal services provided by Royal Mail remain exempt from VAT”, but confirmed they were “currently in discussions with Royal Mail to establish precisely which of their services will be affected [and] any changes will be implemented from a future date”.

Royal Mail said it was still considering the ECJ ruling.

Marc Welby, VAT partner at BDO, said that in future “Royal Mail may no longer be able to rely on the VAT exemption for their individually-negotiated, special-rate services”. He added: “This could mean that the likes of TNT can compete.”

A prospect, surely, that beleaguered Royal Mail would not want to add to its current problems.

IN OUR VIEW

Last week’s HMRC brief discourages businesses claiming “VAT” back from Royal Mail for now, but it looks like Royal Mail will have to charge VAT on some services in future, which will be a blow from a financial perspective.