Changes to the VAT Treatment of Direct Mail Services

Charities and other bodies that cannot recover all their VAT and undertake direct mail campaigns should be aware that HMRC policy changes on 1 April 2015.

The background to this change is as follows. Charities that produce bulk mailings of marketing materials used once to be able to purchase the printed marketing material zero rated and obtain the postage VAT exempt. Unfortunately the VAT liability of bulk delivery changed; it stopped being exempt and became standard rated.

To overcome this many charities arranged for a single supplier to both print the material and send it out to the public. The delivery element, that would have been standard rated, was subsumed into the zero rated supply of printed matter. This meant the whole supply was zero rated and the charity paid no VAT.

Last year HMRC decided that this was wrong and informed the Direct Marketing Association that its members had to charge VAT on the entire supply going forward and should have done for the past. This meant that charities could potentially have received bills for 4 years worth of VAT and this understandably caused some concern in the sector. The Charity Tax Group entered into negotiations and HMRC have agreed to defer the policy change till 1 April 2015.

The new HMRC policy will continue to allow the printing of the material to be zero rated and it is understood HMRC accept this zero rate can extend to services provided by the printer necessary for the material to be mailed such as sorting and addressing.

Under the new rules the printer must standard rate any supply they make of delivered marketing materials. If they supply the printing and associated services preparing for delivery then this will be zero rated but if the charity then buys bulk postage from the Royal Mail in the normal way this will have VAT on it. This will be unless the charity takes advantage of downstream access arrangements. These effectively mean that the mail is delivered by the Royal Mail but the sorting and transport is done by others – possibly the printer. The Royal Mail’s downstream access supply would be VAT exempt. If the printer (or other third party) makes these arrangements for the charity then this exempt element will be invoiced as as a VAT free disbursement.

Theoretically the downstream access route can remove almost all (95%) of the additional VAT that arises as a result of the policy change. But it won’t suit every charity as The Royal Mail applies some quite high minimum mail quantities for downstream access.

The fact that large charities will continue to not be charged VAT on the majority of the cost of a marketing mailing means that they are unlikely to challenge the new HMRC policy by appealing to the Tax Tribunal. The small charities that cannot use downstream access are probably not going to be in a financial position to fund an appeal. This unfortunately means that for now a rather questionable HMRC policy change that will cause hardship for smaller charities is unlikely to go before the Tribunal.

This position may change if the current legal challenge to the VAT liability of downstream access succeeds and the Royal Mail is forced to charge VAT. If this happens I suspect there will be a challenge to the new HMRC policy by an organisation that can afford to make one.

I understand that there are still discussions ongoing with HMRC about the treatment of supplies of printed matter provided with campaign strategic advice and design. So there may be more developments in this area.

If you do make bulk mailings then remember the change is coming very soon. It might pay to consider bringing a campaign forward or talk to your printer about downstream access.