January 14th, 2015 / Insight posted in Articles

VAT on Direct Mailing Services

There has recently been a great deal of concern, particularly from charities, about the VAT treatment of direct mail services. This follows HMRC’s declaration in the summer of 2014 that for VAT purposes they consider the printing and distribution of mail packs to be standard-rated marketing services. There was, of course, considerable angst about HMRC’s change of interpretation of the VAT status of such services that would be bought in the future; but there was even greater angst at the prospect of HMRC attempting to collect VAT and penalties for supplies made during the last four years. HMRC had been intending to make the changes operate from 1 October 2014, which would have given little time to deal with the adverse impact on cash flows and budgets. This was the third major concern with the views that were promulgated by HMRC.

Amongst others, the Charity Tax Group (CTG) and Direct Marketing Association (DMA) led discussions with HMRC to deal with the key issues. A CTG meeting to discuss the issues and form a campaign plan took place in October, which a large number of interested parties attended, including Adrian Houstoun and David Hadley of Kingston Smith.

The issue can best be explained by an example: as a Christmas present you decide to send several copies of a particular book from Amazon. You arrange either for Amazon to deliver these to you or have them delivered directly to the intended recipients. For VAT purposes, books are zero-rated and, when the cost of delivery is included in the contract, the VAT status of the delivery cost is the same as that of the book, i.e. zero-rated. Similarly, a charity or company may contract with a supplier to supply direct marketing packs which the supplier delivers direct to the intended recipients. Hitherto, if the marketing packs were zero-rated printed matter, then it is likely that the supplier would have treated the contract as delivered goods and not charge VAT on either the packs or the delivery service. HMRC have sought to differentiate between the Amazon and the direct marketing packs scenario; further, they maintain that this is not a change of view, but has always been their position. HMRC say this is because, in their opinion, the services involving delivery cannot be regarded as ancillary. This is not so much because of their relative values, but because they are essential to the distribution of the printed matter and so cannot be disregarded (although it is hard to see any difference from buying delivered books from Amazon). They claim that a supply of marketing packs that are delivered by the supplier is a supply of marketing services (standard-rated) and not of delivered printed matter (zero-rated).

As a result of the campaign, two significant changes have been accepted by HMRC. The first is that the changes have been deferred from 1 October 2014 to 1 April 2015. The second is that HMRC have agreed that in most cases they will not seek correction to supplies over the last four years. The cases in which they reserve the right to look back over the past are where a supply has included strategic planning and advisory services that have been subsumed in a zero-rated supply, but should have been standard-rated.

The key aspects of HMRC’s policy are:

  1. The design, printing and distribution of direct fundraising or marketing packs, when supplied as a composite supply, may continue to be zero-rated up until 31 March 2015
  2. From 1 April 2015 the printing (but not delivery) of direct marketing packs will continue to be zero-rated, subject to the usual rules. HMRC accept the following to be part of a composite zero-rated supply of printed matter:
    a) The services necessary and essential for the preparation of the packs for mailing by a carrier, including addressing and sorting for the carrier
    b) The design and creative services prior to the printing of the packs
  3. The supply of services that are advisory, strategic or of a planning nature are always standard-rated
  4. The supply of distribution services is standard-rated if supplied by a separate carrier. However these are exempt if supplied by the Royal Mail either directly or as agent under “downstream access arrangements”.

Charities and organisations that buy marketing packs, as well as the suppliers of the packs, should make certain that they are aware of the rules and budget accordingly, especially for the changes due to take effect on 1 April 2015. It may also be prudent to separate contracts for the design, printing, addressing and sorting of the direct marketing packs, which should be zero-rated, from delivery, and to minimise the VAT on the delivery cost by carefully selecting your delivery arrangements. Following a recent case, HMRC amended their policy on the provision of access to the delivery service of the Royal Mail (downstream service), which relates to a partial delivery by Royal Mail. Other operators collect and sort the mail and then deliver it to the Royal Mail for the final stage of the delivery service. This last stage is called the downstream service. HMRC and Royal Mail agree that this is exempt as part of the universal service, since it must be provided and is price controlled. Exempt organisations, such as charities, can access the downstream service under a separate contract from the upstream service. Accordingly, they can benefit directly from the exemption on the downstream element.If you would like further guidance on this issue, please contact your usual client partner or Adrian Houstoun, Head of VAT.