Charities engaged in direct mail campaigns could be sitting on a "VAT timebomb", following guidance from HMRC on how it will implement VAT rules for bulk mail, the Direct Marketing Association has warned.
A letter from HMRC to the DMA last month states that advertising mail suppliers that combine postage costs with production costs as a way to cut out VAT liabilities for charities can no longer use this practice. This means that charities could face paying an average of 20p more for every letter they send, and could even incur back-dated VAT charges or penalties for avoiding the charges.
Bulk mail, used by many charities when sending direct mail for fundraising purposes, was exempt from VAT until April 2012, when Royal Mail removed the channel from its "universal service" list. The DMA warned at the time that the move would lead to charities being charged an extra £17.9m when sending out direct mail.
Since 2012, the DMA has been pressing HMRC to provide guidance on how the rules will be applied.
While this guidance was being sought, mailing houses have been interpreting the rules in a way that saves them money and makes them more competitive with charities. The practice many have used, known as single sourcing, enables them to combine printing and postage costs and thereby sidestep VAT charges.
The DMA plans to lobby the government to ensure that companies engaged in single sourcing will not be charged for the two years in which they have not paid VAT, and that they are not penalised for using this approach. If they are penalised, some could end up passing the cost onto their charity clients.
Stephen Pidgeon, a fundraising consultant and visiting professor of direct-response fundraising at the University of Plymouth, told Third Sector that the news was very bad for charities and "may be the last nail in the coffin of cold-mailing", which has already been under threat from EU data protection reforms.
Dave Butler, who owns the printing company Dave Butler Print, which specialises in the not-for-profit sector, said: "There was a door open that people were using under the interpretations and it’s taken HMRC two years to decide to slam that door.
"People are now worried that for, big companies, there could be millions that HMRC tries to reclaim."
Mike Lordan, chief executive of the the DMA, said: "Because HMRC have taken an unacceptable length of time to respond to our request for clarification, many businesses now could be sitting on a huge VAT timebomb."
He added: "The smaller charities are more likely to be affected because the larger charities have usually got relationships with Royal Mail Wholesale, which still doesn’t apply VAT."
Asked if there will be any repercussions for companies that have sidestepped the charges, an HMRC spokesman said it would look carefully at the facts of each case before deciding whether or not to take action. "If HMRC needs to take any corrective action, it will be in relation to the supplier and not the customer – whether the customer is a charity or any other business," he said.