The DMA is claiming a major victory in the long-running battle with the taxman over retrospective fines for companies which have been lumping all their mailing costs together to avoid paying VAT.
Following an agreement in principle brokered by the DMA and Charity Tax Group, companies currently using so-called ‘single sourcing’ for mitigating VAT liabilities on direct mail print and distribution costs will not be subject to backdated fines – potentially running into the hundreds of millions of pounds.
The new HMRC guidance, to be introduced on April 1 2015, will also clear up ambiguities surrounding the legitimacy of using ‘single sourcing’, as well as giving businesses time to apply necessary changes to existing contracts.
In April 2012, most mail services became liable for VAT, leading many suppliers to combine postage with print production costs as a ‘single supply’ of zero-rated print in order to mitigate the VAT liability for their clients.
In the absence of firm guidance from HMRC over the past two and a half years, many suppliers have been using the practice in good faith, the DMA claims.
However, in August the industry body warned that the sector could be sitting on a “VAT time bomb” when HMRC announced that many suppliers were incorrectly applying the guidance it had issued. This left many suppliers and their clients potentially facing retrospective penalties totalling hundreds of millions of pounds. One unnamed charity was facing a £700,000 bill.
Many financial services companies and charities also could have seen all their print and postage costs being subject to VAT and facing a 20% increase.
The agreement that has been reached with HMRC means that there will be no retrospective penalties for businesses who had misunderstood the guidance and that the industry has until April 1, 2015 to put in place alternative arrangements and contracts.
Suppliers will still be able to mitigate the VAT on postage after April 1 for those clients – such as financial services or charities – who are unable to reclaim VAT through agency agreements and disbursement, the DMA says.
HMRC has also clarified exactly which additional services can be included as part of a supply of zero rated print and will be issuing revised guidance on this in the near future.
The DMA has lobbied the Treasury and the Department for Business, Innovation and Skills to prevent HMRC from imposing backdated VAT charges and penalty fines for businesses while the industry has awaited guidance.
Mike Lordan, the DMA’s director of external affairs, who led the discussions, welcomed HMRC’s agreement: “Many businesses and charities can now breathe a sigh of relief that they won’t be facing any retrospective penalties – which could have run into the hundreds of millions of pounds – as a result of a genuine misunderstanding. We now also have the unambiguous guidance that we have been seeking that will allow all suppliers to compete on a level playing field.
“We’re pleased that HMRC has given the industry a realistic timescale to work to. It gives the sector breathing space to prepare for the changes without compromising their businesses.”
Related stories
New HMRC blow to charity direct mail
Charity faces £700k VAT bombshell
Vatman lurks for direct mail firms
Royal Mail takes £24m DM hit
Royal Mail trials Sunday service
Royal Mail demands TNT probe
Ofcom probes Royal Mail charges
Mail revamp sparks VAT bombshell
Royal Mail to set its own prices
Industry warns of direct mail exodus