Warning over VAT “time bomb” for ad mail companies in the UK

Direct mail companies in the UK working on behalf of financial services firms or charities have been warned they could be sitting on a huge VAT “timebomb”. The industry has been waiting for two years for guidance from the UK tax authorities, HM Revenue & Customs, on a removal of the VAT exemption on bulk mail services.

Since the new rules came into force in April 2012, some ad mail firms have combined postage costs with production costs in order to cut out the VAT liabilities for financial services businesses or charities, which are unable to claim back or charge VAT.

But the Direct Mail Association warned today that this practice, known as “single sourcing” may not be seen as exempt from VAT under the two-year-old legislation, when the long-awaited guidance finally emerges from HMRC.

It means that companies could find themselves with a large backdated tax bill as well as penalties, the DMA said.

Mike Lordan, the DMA’s director of external affairs, warned that the HMRC’s lack of communication could put many advertising mail suppliers out of business.

“Thanks to HMRC taking an unacceptable length of time to respond to our request for clarification, many businesses now could be sitting on a huge VAT time bomb,” he said.

“While we’ve advised businesses to take a cautious approach, the ambiguity surrounding the rules means that many businesses have interpreted the rules differently. Until now, HMRC has not issued guidance to the contrary. HMRC created this vacuum so it would be extremely unfair for them now to penalise companies.”

The DMA said it was now planning to lobby Treasury and business ministers to prevent HMRC from imposing backdated VAT charges and penalty fines on businesses covering the period when the industry waited for guidance.

Royal Mail

Royal Mail, the UK universal service provider, said it would have concerns at any further increase in mailing costs for customers unable to recover VAT.

Jonathan Harman, the managing director of MarketReach, Royal Mail’s direct mail support unit, called on the HMRC to work together with the wider mail industry to bolster the “vital” sector.

“Royal Mail would be concerned about any further increase in mailing costs for charities and other businesses that are unable to recover VAT,” he said.

“Direct contracts for postal services between charities or financial services companies and Royal Mail are unaffected – including Downstream Access contracts which continue to be exempt from VAT.”