Retrospective VAT liabilities for charities and suppliers of bulk mailings

HMRC has now issued its Revenue and Customs Brief in respect of the VAT liability of direct marketing services using printed matter. HMRC has taken the view that the delivery of mail packs to members of the public is a standard rated marketing service and the zero rating of mail packs is not possible within a single standard rated marketing service.

Unfortunately many suppliers have historically wrongly zero rated mail packs as a supply of zero rated delivered goods, and HMRC accepts there have been occasions when the correct treatment has been misunderstood based on its guidance.

In view of this, HMRC has introduced a transitional period for suppliers who only provide the delivery of addressed or unaddressed mail. HMRC will not seek to collect VAT prior to 1 August 2015 for suppliers who agree to the transitional arrangements.

However, in cases where other services are provided, eg data cleansing, response handling, HMRC is looking to collect VAT retrospectively which could create significant liabilities for suppliers of such services. Under contractual arrangements, these liabilities may well be passed on to charities with the issue of retrospective VAT only invoices.

It is questionable whether HMRC’s analysis is correct in law given that the view could be taken that the predominant supply is one of zero rated printed matter.

Moreover, HMRC’s internal guidance directs suppliers to the ‘package test’ allowing zero rating for bulk mailings. Industry practice and instructions from visiting VAT officers have clearly accepted the supply of such services is multiple and the delivery of mail packs is a zero rated service which is separate to any other service the supplier may provide.

Given the confusion, and HMRC’s own guidance which has clearly indicated the ‘package test’ should apply to such services, hopefully HMRC’s approach will be reasonable given its failings in providing clear guidance to suppliers, charities and their advisers. Retrospective action should only be sought in exceptional cases.

What should you do now?

Suppliers of such services should now review their arrangements and consider whether they wish to settle with HMRC or demonstrate they have applied the rules in accordance with HMRC’s clear agreement of the position. If this is the case, suppliers will need to demonstrate that they have been misdirected by HMRC. HMRC, at this stage, has given no assurances in this respect.

Charities should liaise with their suppliers in order to clearly establish both the retrospective and future position in terms of VAT charges. Charities will want to ensure that, if possible, suppliers take advantage of the transitional arrangements rather than passing on the VAT charge to them.

For further information please contact Nick Sladden or Steve Hodgetts