VAT on postal charges
Many charities and not-for-profit organisations will be affected by the introduction of VAT on a number of Royal Mail postal services from 2 April this year.
Some postal services, including stamped or franked first and second class post, will remain exempt from VAT as they are part of the Royal Mail's universal service obligation. Other postal services subject to regulatory price control will also remain VAT exempt.
However, VAT will be charged from 2 April 2012 on many other postal services, including business collections, Special Delivery" Next Day (on account only) and door to door. A full list of the postal services that are changing their VAT status on 2 April, can be found on the Royal Mail website at the following address: www.royalmail.com/customerservice/ terms-and-conditions/vat-changes
The addition of 20% VAT on postal services will be a significant cost increase for organisations that cannot reclaim all of their VAT. For those that are partly exempt and able to reclaim a proportion of their VAT costs, it may be an opportune time to review their VAT recovery calculations to try to mitigate the irrecoverable VAT costs.
Charities and other organisations that are not VAT registered, should ensure that they are taking advantage of other measures to minimise the VAT cost of postal campaigns, such as the zero-rating of campaign packs where individual elements might otherwise attract VAT.
Whether or not charities are normally able to reclaim some VAT costs, the changes in April might still involve a bottom-line cost. If you use a franking machine, Royal Mail has said that the services on which VAT will be charged from April can only be purchased through 'smart' franking machines, which will also produce VAT invoices; the VATable services cannot be purchased through older franking machines.
VAT cost sharing exemption
In the autumn 2011 edition of the charities bulletin, we reported that HMRC was in consultation about the implementation of a cost sharing VAT exemption. In the Chancellor's Autumn Statement on 29 November it was announced that legislation will be introduced to implement the cost sharing exemption in 2012.
This exemption will allow groups of eligible organisations, including charities, academy schools, universities, higher education colleges and housing associations, to provide services to each other without generating an irrecoverable VAT cost, provided the services are directly necessary for the consortium member to carry out its exempt and/or non-business activities.
Newly formed cost sharing consortia can apply the VAT exemption from the date when the 2012 Finance Bill receives Royal Assent. HMRC has said that it will publish comprehensive guidance on the conditions and eligibility to use the cost sharing exemption in advance of its legal effect. HMRC has acknowledged that it cannot prevent cost sharing arrangements from being formed prior to the new legislation coming into force because the exemption already exists in EU VAT law. However, HMRC does warn that incorrect implementation of the exemption before it becomes UK law could result in it taking action to recover any VAT that should have been charged, including the charging of penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
