Tag: Royal Mail

Postcomm has welcomed the announcement earlier this week of a new type of access arrangement, designed to allow VAT-exempt organisations, including financial institutions and some charities, to take better advantage of the choices available in the newly-competitive mail market.

Under the new arrangements, mail operators offering access will no longer be required to charge VAT on the whole cost of their access schemes. Instead, VAT is only required to be charged on the ‘upstream’ element of these arrangements – that is, the collection and sorting services offered by Royal Mail’s competitors.

The ‘downstream’ element – delivery – is provided on competitors’ behalf by Royal Mail, which is itself exempt from charging VAT on the services it supplies to customers.

Until now, VAT was required to be charged on the full cost of access arrangements with licensed operators. Non-exempt organisations have been able to offset that cost against their own VAT payments. But VAT-exempt organisations have not, making access arrangements – and the services offered by Royal Mail’s competitors – more expensive, in practice, for them.

Although Postcomm has welcomed today’s announcement, it remains concerned that there is not a ‘level playing field’ for licensed postal operators: Royal Mail is exempt from charging VAT, while other operators are required to charge the full 17.5%, making it harder for them to compete on cost for the business of VAT-exempt mailers. This is a significant barrier to postal market entry for new operators, particularly end-to-end operators, who make their own deliveries, and whose VAT liability remains unchanged.

Postcomm’s preferred solution would be a reduced, uniform rate of VAT, to be applied to all postal operators, including Royal Mail. For example, a 5% rate applied across the board would create a level playing field without resulting in significant price rises for customers.

Royal Mail today responded to Postcomm’s newly announced review of the 2006-2010 Price and Service Quality Control, saying:

• The UK mail market has fallen by 2% and is set to fall further.

• The drop in mail volumes compares with Postcomm’s predictions in setting the price control that the market would rise by between 1% and 2% annually.

• It is now increasingly likely that no other EU country will open its market to competition as Postcomm has done in the UK. This leaves our major rivals with protected home markets while at the same time they can enjoy a regulatory regime in the UK which is heavily tilted in their favour.

• Competition in the UK is developing at a much faster pace than originally predicted – Royal Mail’s competitors will handle around 2.5 billion letters this year, well ahead of expectations and equivalent to 25% of bulk business mail.

• That means that this year alone rivals are carrying around 600m more letters than had been anticipated when Postcomm set the price control, and although rivals require Royal Mail to deliver these letters over “the final mile” to homes and businesses, the price Royal Mail is allowed to charge for doing so doesn’t cover our costs.

• Royal Mail cannot compete fairly for business mail because the price control dictates that when we offer to lower our prices we have to reduce the amount we charge rivals to use our network by the same degree.

• As quality of service has improved across all our products and services our business customers are choosing to use Second Class and other cheaper services instead of First Class, reducing Royal Mail’s revenues.