UK Royal Mail should lose its VAT privilege, regulator says

Royal Mail will come under pressure to abandon its privileged position on VAT when the new postal regulator makes his first public comments.

Nigel Stapleton, who took over as the head of Postcomm last month, will tell a postal conference in Amsterdam that there must be a level playing field for all companies wanting to trade in postal services and that Royal Mail’s exemption from charging VAT is unfair.

Other postal groups must charge 17.5 per cent VAT on their services. The postal regulator does not have the power to scrap Royal Mail’s privilege but Mr Stapleton’s comments will put more pressure on the Treasury to take action. Royal Mail’s rivals have long complained that the state-owned business should not have such a competitive advantage.

Mr Stapleton will also press Royal Mail to open its infrastructure to more rivals. The company signed its first deal to distribute a competitor’s mail several weeks ago.

The new head of Postcomm wants to see more evidence that Royal Mail is not dragging its feet over competition after it took two years to agree the first deal with UK Mail, a subsidiary of Business Post.

Royal Mail will also be asked to produce a long-term business plan as it faces the prospect that its pricing regime is extended to five years rather than the current arrangement of three years.

Negotiations are soon to start over a pricing programme that will apply from 2006. The postal group will be asked to produce a business plan running up to 2011. But the postal group will be wary of agreeing to a long-term pricing regime when competition is still being introduced to the market. It will argue that it needs time to see how a deregulated market develops.

In the long term the new regulator will want to see more investment in new technology. It believes that Royal Mail trails international postal groups in technical systems such as those used to track post.

Royal Mail is expected to open pricing negotiations with a warning that its financial recovery shouldn’t be jeopardised by a tough regime. However, Postcomm is sceptical that its finances have been as rocky as they have been presented. Only three years ago the group was profitable and last year a large part of its GBP600 million loss was a result of restructuring charges.