17 December 2014

Threat of retrospective VAT penalties for direct mail is averted

Previously, we warned 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, which 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, and was viewed by most people in the industry as being within the guidelines announced by HMRC at that time. 

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. After 18 months of chasing, HMRC wrote to the DMA this July stating 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 did not comply with their interpretation of the published guidelines. HMRC also added that where a supplier produces a direct mailing pack and also 'arranges' postage, then standard rate VAT should apply to the entire supply, not just the postage element. However while HMRC's letter indicated that they intended to publish updated guidance this year, they have yet to do so. 

In addition to the risk of retrospective penalties, subsequent correspondence from HMRC also confirmed their view that while some other services could be included as part of a zero-rated supply of printed matter, including 'artwork, design or similar leading to the supply of printed matter', postage could not 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'. 

Both the BPIF and the DMA therefore subsequently lobbied both the Government and HMRC itself to try to prevent HMRC issuing retrospective charges and penalties. We also stressed that most bulk mail requires sorting and processing to meet strict requirements specified by the postal services provider and to optimise bulk mailing discounts, arguing that bulk mailings that have been subject to sortation only should therefore not be subject to VAT and removed from any definition of 'data handling' that HMRC adopts in deciding when VAT should be applied to postal services. We also argued that if the forthcoming HMRC guidance does determine that postage is to be subject to standard rate in circumstances where the printer is responsible for 'arranging' postage, then the print production services element of any bulk mailings should still remain at zero rate VAT. 

We are pleased to report HMRC has now agreed that there will be no retrospective demands for VAT or penalties to those suppliers and their clients who were including postage as part of a supply of zero-rated print. HRMC has also agreed how postage and other services should be treated in future, along with a forward implementation date of 1 April next year to give time to put in place alternative arrangements.  

HMRC will be issuing revised guidance but have confirmed that from 1 April 2015 they will be applying the following criteria: 

• Postage included with zero-rated print as a composite supply will be treated as a supply of advertising at standard rate  
• Zero-rated print may be supplied with standard rated postage as part of a multiple supply. Supplying both services separately does not constitute a supply of advertising services  
• Zero-rated print can also be supplied with postage that is treated as a disbursement e.g. under agency agreements 
• Data processing that is necessary to meet the postal operator's published requirements can be included as part of a zero-rated supply of print. Any data work that is not required for making the print suitable for posting e.g. selections, targeting, list buying, profiling, should be a separate standard rated supply 

Although we now have to accept that postage on bulk mailings will definitively become subject to VAT from next April, this is good news for direct mail suppliers and their clients. Not only has the threat of potential retrospective VAT claims that could have run into hundreds of millions of pounds been averted, but HMRC has also moderated their original interpretation - which would have meant significantly greater costs for clients such as financial services companies and charities. It also gives long-awaited and unambiguous guidance on how to apply VAT in future.