The Royal Mail does not currently charge VAT for its postal services, but other postal operators are required to, at 17.5 per cent. The postal services regulator Postcomm says that although this has little effect on those businesses that can reclaim VAT, many major mailers, including charities, are not able to, putting Royal Mail competitors at a disadvantage.
Postcomm has published a consultation document recommending that the Royal Mail's VAT exemption be reviewed "as a priority".
"The Government is under pressure from Europe and new entrants to the postal services market," said a spokesman for Postcomm. "It's likely that some degree of VAT will be applied, and that may add to costs."
Postcomm has recognised that even a small increase in the price of postage could have a big effect on charities that depend on large-scale mailings to supporters, and any introduction of VAT is likely to be phased. But the Charities' Tax Reform Group says that its members would not be reassured by any transitional rate.
"It would imply that we weren't going down the road we were hoping for," said Helen Donoghue, the group's administrator. The body says that if the Royal Mail loses its VAT exemption, it would want it to be introduced at a reduced rate, and with no increase in the price of postage. "Without these provisions, the voluntary sector will be massively hit," she said.
"The problem is that many charities cannot reclaim VAT," said the group's policy and campaigns officer Sophie Chapman. "VAT is underpinned by the assumption that the cost of a service or product is borne by the final consumer. Charities do not pass on their costs and are effectively penalised."
The Institute of Fundraising is in the process of canvassing opinion from its members for responses to Postcomm's consultation document, which must be submitted by 12 April. "We are not wholly comfortable with Postcomm's assurances," said Andrew Watts, the institute's deputy chief executive.
"We conducted a survey of our members when this issue was first raised. We found that the total spend on postal services in the fundraising departments of large charities was between £3,000-£5,000 a year. Even a 5 per cent VAT increase would be significant and charities would be hit hard. This is an issue that the sector needs to respond to with some degree of force."