Postal operators welcome Brussels legal challenge to VAT exemption of Royal Mail

Private sector post operators yesterday welcomed the European Commission's launch of legal proceedings against the government for exempting Royal Mail's postal services from value added tax.

The state-owned postal service enjoys exemption from VAT that rivals say gives it an automatic price advantage in a market that was opened to full competition on January 1.

However, bulk mailers were divided on a move that could lead to higher postal charges for some business sectors, including some of the largest mail users.

Royal Mail warned that ending the exemption could mean higher prices for the majority of its users who cannot use private operators. "We wouldn't want to see VAT on postage stamps that individuals, small businesses and charities would have to pay," it said.

The Commission has asked the UK and two other European Union countries to justify their application of the VAT exemption rules for postal services in the first step in infringement proceedings that could lead to a legal challenge in the European Court in Luxembourg.

Lazlo Kovacs, the taxation commissioner, said that failure to apply the rules properly created "distortions of competition in a liberalised market between former monopolies and market entrants".

Royal Mail's rivals say the impact of VAT exemption gives them an approximate 13 per cent price disadvantage when competing for new business.

This is less than the full rate of VAT because Royal Mail's prices include the tax on goods and services it purchases which it cannot reclaim.

The extra cost of the tax on private postal services can be reclaimed by users that are registered for VAT. But the tax cannot be reclaimed by users that are VAT-exempt, including large mail users such as the financial services industry and charities.

Alan Halfacre, chairman of the Mail Users Group, said: "There is no freedom of choice for users that are not registered for VAT."

However, he acknowledged that ending the VAT-exemption could mean such users eventually paying higher charges. "We want a level playing field, but one that accommodates businesses that cannot reclaim VAT."

TNT, the Dutch group that is one of Royal Mail's UK competitors, said the VAT rules made it very hard for new entrants to win some of the lucrative contracts for distributing mail.

Without being able to compete for the large mailings typical of financial services organisations, it was hard to achieve scale in operations.

The Treasury said yesterday that there was no question of VAT on postage stamps.

Brands face post rise as EC enters VAT row
Precision Marketing, p 5 04-14-2006
Brussels mandarins have waded into the argument over Royal Mail's VAT exemption by launching legal proceedings against the Government, in a move which could force a huge hike in postal rates.

The postal operator's rivals have been pushing for a review for months, saying the exemption gives Royal Mail a significant price advantage.

Postcomm recently admitted that VAT, along with consumer awareness levels and the risk of anti-competitive behaviour, represented a significant barrier to competition in the postal market – claiming that it will be some years before Royal Mail's dominance is threatened (PM November 5).

But a Royal Mail spokesman warns that scrapping the exemption could lead to higher prices – "especially for individuals, small businesses and charities".

The tax can be reclaimed by users who are VAT-registered, yet some industries – including financial services and charities – cannot reclaim it, as they are VAT-exempt.

The UK is not alone in offering VAT exemption. The EC has also demanded that two other EU member states justify why their state postal operators are let off the hook.

The inquiry is only in its initial stages, but could spark a legal challenge in the European Court in Luxembourg.