EU VAT plans `will add 5p to UK postage stamps'

European plans to impose VAT on national postal services could put 5p on the price of a stamp, it was claimed today.

The Government vowed to oppose the idea, as both Conservative and Labour Euro-MPs condemned it as an unnecessary new burden on consumers.

But EU Tax Commissioner Frits Bolkestein insisted there would be no “significant” price rises and said he was just trying to create fair competition between traditional state postal services and private rivals.

The problem is that state postal service operators are exempt from VAT but their competitors, as private businesses, have to charge it.

In the interests of the European single market, the Commission is intervening in order to create a “level playing field”.

Mr Bolkestein said the impact on private consumers should be minimal. If the Post Office had to charge VAT it would also be entitled to deduct VAT from its own business costs, passing on those savings to its clients, he said.

But Labour MEP Brian Simpson (North West England) was sceptical: “Is it likely that the Royal Mail, which is losing millions, is going to pass on any savings it may make in its own running costs if this Commission plan is applied? Of course not. The whole extra burden will fall on customers and that means 17.5% VAT on the price of a stamp – near enough five pence, putting the price at 33p.”

He added: “Mr Bolkestein is determined to do this as part of his endless desire to liberalise the entire postal sector. We’ve been fighting him on this for five years, because the first people to suffer from extra costs or reduced services are people in rural areas, who rely on their sub-post offices.”

Conservative MEP Theresa Villiers (London) said the idea amounted to an EU tax increase: “VAT should not be extended to cover postal services. This would be another damaging blow to our hard pressed postal services.

“Conservatives are committed to defending VAT exemptions and zero rates – with 60 tax rises from Chancellor Gordon Brown, we don’t need more from the European Commission.”

A Government spokesman said: “The Government is opposed to VAT on stamps and will make this clear in future negotiations on this issue.

“We fully support competition within the postal market in the interests of consumers, but only when consistent with ensuring provision of the universal postal service at a uniform tariff.

“The postal service plays an important social role in universal service provision and the tax system should reflect that.”

To counter the expected consumer backlash the Commission is offering governments the option to apply a reduced VAT rate to “standard postal services” involving all addressed items up to 4.5lb in weight.

That should “counter further any possible price increases for private consumers” said a Commission statement.

State postal services were exempted from VAT in the 1970s, when they had a monopoly and there was no competition.

But now traditional postal services have been opened up to competition from private operators, the Commission says it is increasingly hard to justify a VAT exemption for just one part of the market.

Mr Bolkestein said: “VAT exemption has never meant VAT-free and most people have never realised that they are already paying some VAT on postal services, albeit in a hidden form.”

Today’s plan is part of a wider scheme to streamline the EU VAT system and help the single market more competitive and therefore more effective for consumers and businesses.