Policy & Research
Background briefings
VAT
Introduction
Royal Mail is currently exempt from charging Value Added Tax (VAT) on most services it supplies to customers. In contrast, alternative providers, including those licensed to provide competing postal services, are required to charge their customers VAT at the full rate. Alternative providers are therefore less able to target VAT exempt companies, who are among some of the largest mailers and include banks, other financial institutions and some charities. VAT policy is a matter for the government, and the UK Government must operate within the constraints of the common VAT regime of the EU.
European developments
Since VAT rules on postal services are not yet modernised the European Commission argues that the postal VAT exemption should only apply as far as the strict discharge of the universal service obligation is concerned. Where, for commercial reasons, former monopolies offer to some clients conditions that are not available to the general public, they are acting as commercial operators attempting to fend off competition. By consequence, they should be subject to the same VAT rules as the other operators in the postal market. The Commission argues that the current situation creates competitive distortions.
Recent developments
Under new arrangements, mail operators offering access are no longer required to charge VAT on the whole cost of their access schemes. Instead, VAT is only required to be charged on the ‘upstream’ element of these arrangements – that is, the collection and sorting services offered by Royal Mail’s competitors. The ‘downstream’ element – delivery – is provided on competitors’ behalf by Royal Mail, which is itself exempt from charging VAT on the services it supplies to customers.
Before this change, VAT was required to be charged on the full cost of access arrangements with licensed operators. Non-exempt organisations have been able to offset that cost against their own VAT payments, VAT-exempt organisations have not, making access arrangements – and the services offered by Royal Mail’s competitors – more expensive for them.
The UK Government has announced plans to remove Royal Mail’s VAT exemption from some services as of 31 January 2011. This does not apply to most of the services commonly used by residential and small business consumers, but more information about this issue can be found on Royal Mail’s website.
