18 November 2014

VAT and bulk mail postage

Members may have seen recent reports suggesting that direct mail suppliers could face backdated VAT bills following HMRC's decision in April 2012 to strip bulk mail of its VAT-exempt status. This decision led many suppliers to charities and financial services businesses that are unable to claim back or charge VAT to use "single sourcing" as a means of cutting out the VAT liability. This practice combines the postage cost with the production cost, meaning that the entire supply could be zero-rated. This was viewed by most people in the industry as being within the guidelines announced by HMRC in April 2012.

Since then the Direct Marketing Association (DMA) has been pressing HMRC to issue clear guidance on whether single-sourced advertising mail would be exempt from VAT charges. Now, after 18 months of chasing, HMRC has written back to the DMA saying that it intends to issue new guidance on single-sourcing. HMRC has made it clear however that single-sourcing, in their view, changes the nature of what is being supplied from zero-rated goods (print), to a fully VAT-able supply of a service, with the attendant risk that HMRC could potentially issue backdated VAT bills and penalties to companies that have not complied with their interpretation of the published guidelines. Although HMRC have indicated that they are likely to publish new guidance in the near future, they have not yet done so and the DMA is lobbying the Treasury and HMRC to try to prevent HMRC issuing retrospective charges and penalties to businesses until such time as HMRC publishes clearer guidance.

Background

Over three years ago, the BPIF, Institute of Practitioners in Advertising (IPA) and the Direct Marketing Association (DMA) wrote jointly to HMRC to voice concerns on their approach to VAT supply splitting and single-sourcing. At that time, we argued that printed mail inserts and direct mail should be wholly eligible for VAT zero-rating, that there should be no back tax assessments applied should this position change, and that HMRC should publish a set of guidelines for their inspectors to follow so that a consistent approach is applied on the ground. 

New rules introduced in April 2012

In the event, new rules on VAT applicable to 'supply splitting' and single-sourcing were subsequently enacted under the Finance Act 2011. Bulk mail lost its VAT exempt status and postage costs became subject to VAT charges of 20% with effect from April 2012. In proposing this change, HMRC had argued that "This measure supports the Government's objective of making the tax system fairer by closing a VAT avoidance scheme that is being used to reduce the amount of VAT due where a business supplies a service together with printed matter that is ancillary to that service. It will also ensure that there is a level playing field by preventing the small number of users of this scheme from gaining an unintended financial advantage". 

Under the new rules back assessment could take place, although back to April 2012 only. However HMRC did not publish the supporting guidance that we asked for and have yet to do so. 

HMRC letter states when postage does not fall into zero rate category

After 18 months of chasing, HMRC sent a letter to the DMA on 16 July this year stating that it does now intend to issue new guidance on single-sourcing later this year. The letter clearly states that HMRC sees postage as an essential element of advertising mail, not an ancillary one, and therefore does not fall within the zero- or reduced-rate category:

"If postal services are provided in addition to the printed matter itself then the supply is not a composite supply of goods to your customer, but is a supply of services as the "goods" are sent direct to the recipient rather than your customer. Even if the supply consists of different elements such as printed matter and postage, one element is not ancillary to another because they are both essential to the overall aim of the contract. For example, the function of the direct marketing campaign is to send out the promotional material so the postage element is at least as important as the printed matter element. This is the reason that the postage is not ancillary to the printed matter because the nature of the supply has changed and so it cannot take the same VAT liability. As this supply does not fall within the zero or reduced rate, the whole supply must be taxed at the standard rate of VAT."

(Although if the company is a mailing house and has been treating postal charges as a 'disbursement for VAT purposes', it may be able to continue to do so) 

This interpretation flies in the face on the view previously held by most people in the marketing industry (agencies, mailing houses, printers and print managers, marketing operations companies), as well as some independent tax advisors, that postage on direct mail did not attract VAT if it was part of a single supply where the direct mail piece itself was zero-rated. The letter also contains several ambiguous "examples" about when postage should be zero-rated or not. 

VAT and the provision of marketing services

HMRC's 16 July letter also makes it clear that where marketing services are provided as well as printing services, VAT will apply:

"The production of printed matter can only be zero-rated when it is supplied in isolation and qualifies for zero-rating in its own right. When other services are provided by a printer, or direct marketing business, the nature of the supply changes to one of providing a marketing service. If a supplier is required to analyse or organise customers' details or is responsible for posting or distributing the marketing packs or leaflets in addition to printing the material themselves this is not simply a zero-rated supply of printed matter. Services such as these are not ancillary because they are essential to the distribution of the printed matter and so cannot be disregarded. The overall supply is properly regarded as one of marketing rather than a supply of printed matter with ancillary supplies." 

According to the "examples" given in the HMRC letter, the only exceptions seem to be where a printer simply produces a direct marketing pack and sends it to their client without any other service being provided, or where a business produces the printed pack with the client providing a list of names and the printing company pays postage costs on behalf of the client (in which case the supply of postage does not attract VAT because the charge is a disbursement and so is outside the scope of VAT altogether - since the printer cannot recover the VAT on postage as this VAT will be incurred by the client). However they say that if a printer produces a direct marketing pack and is also responsible for "arranging" postage, then the postage is not ancillary to the printed matter because the nature of the supply has changed and so it cannot take the same VAT liability. As this supply does not fall within the zero or reduced rate, they take the view that the whole supply must be taxed at the standard rate of VAT. This is of particular concern to any printer providing mailing services, since all bulk mail services require some degree of sortation to qualify for postal service providers' discounts. We do not accept that those data handing processes needed simply to ensure printed materials are suitable for posting should be regarded as a 'marketing service'.

DMA publishes advice to their members

The DMA published the following advice to their members on their website on 7 August this year:

"If you are including postage as part of a zero-rated single-source supply we strongly recommend that you stop as soon as possible and, if necessary, show customers a copy of the letter we have received from HMRC to explain why you are taking this course of action. The HMRC letter overrides anything you may have received from your local HMRC office in the past allowing your business to include postage as part of a single source supply. However, it does mean that you may not be subject to retrospective penalties and the DMA is lobbying both HMRC and the Government to ensure businesses aren't hit with punishing backdated penalties. But it is important to stop using postage as part of a zero-rated single-source supply as it may weaken any appeal if you are subject to any penalties that may be applied in future following a VAT assessment." 

What next?

The DMA are now lobbying to seek to prevent HMRC from issuing retrospective charges and penalties to businesses until such time as they issue clearer guidance, and also to get a clear and consistent definition of the VAT liabilities when providing advertising mail print and postage so that there is a "level playing field" and all suppliers can compete on an equal footing. 

In response to these lobbying efforts further letters were received by the DMA from HMRC and Treasury dated 30 September this year, which suggest that there will be no retrospective charges prior to that point in time. However they add that printers who fail to 'correctly' apply VAT to postal costs will face charges from 1 October. 

HMRC's latest letter does confirm that some other services can be included as part of a zero-rated supply of printed matter: "if the other services are artwork, design or similar leading to the supply of printed matter then HMRC would generally accept that this is a zero-rated supply of printed matter". However they reiterate their view that postage cannot be included: "if the other services include activities such as data handling, data management/processing, targeting of potential customers, distribution, media inserts, response recording and analysis, follow up to responses and similar then the essential features are likely to show that it is more than a supply of printed matter. What the printer is essentially being asked to do is to produce a mail pack which is delivered to a large number of recipients to get a message across; it cannot in our view be merely characterised as providing printed matter."

In a subsequent reply to HMRC and Treasury dated 17 October, the DMA has pressed for the deadline for implementing any changes to VAT treatment of single-sourcing to be extended until such time as official guidance is forthcoming from HMRC.

The DMA is also meeting with the Charity Tax Group and the Institute of Fundraising to discuss the matter, as charities are one of the groups that will be hit the hardest by HMRC's current interpretation of the rules. It is likely that HMRC will be challenged in the courts if they proceed with their current interpretation.

BPIF position

The BPIF has been in close contact with the DMA on this issue. BPIF Finance Director Peter Allen has also written to HMRC and to Business Secretary Vince Cable MP to voice our concerns. Our Government and Industry Committee discussed these developments at its meeting on 21 October and agreed that we should make all member companies aware of this issue - hence this briefing note. The matter remains unresolved, with HMRC continuing to take a view on this that we and theDMA do not accept as correct. We will write to members again in the light of any further developments, particularly when HMRC do eventually issue the formal guidance that they have been asked for repeatedly and which they have indicated will be forthcoming soon.

In view of the lack of clarity that remains regarding HMRC's interpretation, the Committee concluded that we should not offer any advice at this time on whether to move to standard rating in relation to single-sourcing. Although HMRC has stated that they expect all supplies to be treated 'correctly' from the 1 October, we are concerned that until such time as official guidance is forthcoming some businesses will continue to zero-rate postage on a single supply of goods, placing those who do not at a competitive disadvantage if they cease to do so.