Ofcom’s plan to let Royal Mail set its own prices for commercial bulk mailing services will lumber firms with massive VAT bills, and could be the final nail in the coffin for direct mail, the DMA has warned.
Under current HMRC guidelines, bulk mail is exempt from VAT charges. The removal of price controls would automatically make bulk mail services and products liable for VAT under HMRC rules. Unless Ofcom revises its proposals as a result of responses to its consultation, then restrictions on price controls will be lifted on April 2, 2012.
While most businesses can claim back VAT payments, charities and companies working in the financial services – two of the biggest users of direct mail – cannot. A mandatory 20% increase, coupled with a potential rise in product and service costs, would seriously damage the long-term prospects of the medium, according to DMA chief of operations Mike Lordan.
Lordan said:”The prospect of VAT charges is a serious financial issue for users of bulk mail, but the industry is being left in the dark by HMRC and Royal Mail who have yet to clarify the details about the changes.
“We need to know if the possibility of adding VAT is based on current guidelines or some as-yet unannounced plans, and if VAT will be collected from April 2 or if there will be a grace period. Most companies can claim back VAT, but this additional cost needs to be factored into cashflow planning. Financial services businesses and charities need to factor this extra cost into their budgets.
“These additional costs could well prove to be the final straw for many companies that will abandon the medium in favour of more competitively-priced marketing channels.”
In December 2011, the DMA convened a high-level summit of business mail users, postal service providers, senior marketers and industry trade associations, to address industry concerns about the recent Ofcom public consultation on a raft of controversial changes to postal regulations to boost Royal Mail’s profitability. The DMA submitted a formal response to the consultation outlining its concerns with the proposals on behalf of its members.
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Charlie says: “There is a massive difference between regulating with a light touch and allowing one player to ride roughshod over the rest. It does make you wonder if Ofcom has really grasped what this move will achieve. And, as for Royal Mail, there is a fine balance between making money and alienating your most profitable customers.”