HMRC rocks industry with direct mail VAT bombshell

HMRC has delivered a major blow to industry efforts to prevent agencies and charities from facing penalties for so-called “single sourcing” of direct mail – which lumps together costs like print, production and post – after the taxman rejected Cello Group’s settlement of £2.4m.
The issue dates back to January 2012, when Ofcom let Royal Mail set its own prices for commercial bulk mail, automatically making them liable for VAT. To circumvent the changes, many charities and their agencies combined the print and postal costs to make them VAT exempt.
However, HMRC cried foul over the move, sparking months of top-level negotiations between the taxman, the DMA and the Charity Tax Group.
At the time, it was claimed that one UK charity faced a £700,000 retrospective VAT bill, although for Cello – which owns charity specialist agency Brightsource, as well as Tangible and Blonde Digital – the situation is much more serious.
Last year, the DMA claimed it had won major concessions and published a letter from HMRC. In the missive, it agreed that its guidance was open to misinterpretation and said that it did not intend to take any retrospective action against companies that had “misunderstood” the guidance, although it did not say how it would rule on this.
In a note to shareholders, Cello Group said: “Following extensive dialogue with HMRC, the group made an offer of settlement to HMRC of £2.4m to resolve the retrospective position.
“Cello can confirm it received a letter from HMRC which disappointingly rejected the settlement offer. Since receipt of this letter the group has been in discussions with its specialist advisors to understand its impact on the dispute. Discussions with HMRC also remain ongoing.”

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