Calls to scrap arrangements allowing charities to pay lower VAT charges on bulk mail services should be referred to the European Court of Justice, a High Court judge has suggested.
HM Revenue & Customs currently allows buyers of bulk mail services to pay private companies to sort mail and deliver it to Royal Mail depots. The Royal Mail is then paid separately to take the post to the door.
If the two services are offered separately, the private providers charge VAT on their ‘upstream’ services to sort the mail and deliver it to depots. But the Royal Mail does not charge VAT for ‘final-mile’ or ‘downstream’ delivery services, which make up most of the cost of bulk mail services.
A commerical firm would normally sign a single-delivery contract, which would require it to pay VAT on both upstream and downstream services, because it is able to reclaim VAT.
But HMRC has agreed that organisations that cannot reclaim VAT, including charities and financial services firms, should be allowed to agree separate contracts for upstream and downstream services.
The agreement with HMRC was developed after an earlier ruling by the European Court of Justice that mail services open to competition should be standard-rated for VAT, enforced in this country from January 2011.
The postal company TNT has objected to the existing arrangement, saying it creates unfair competition with its services. After a judicial review in the High Court last month, Mr Justice Parker said in a judgment that TNT’s position was "arguable".
"I would invite the parties to consider carefully this judgment with a view to exploring the best way forward," he said. "At the moment I am inclined to think that a further reference to the Court of Justice may be desirable."
Graham Elliot, a tax consultant at the commercial law firm Withers Worldwide, said that charities should consider budgeting for higher bulk mail bills in the future.
"Any charity that might take advantage of the current exempt status of the downstream service should bear in mind the possibility of that status being withdrawn from some date in the future," he said.
"While that should not affect current arrangements, it might be appropriate to budget future costs with the potential for VAT being added. In particular, any binding contractual arrangements will need to take into account this potential future liability."