The Charity Tax Group has written to HM Revenue & Customs asking for urgent clarity on potential changes to direct mail VAT rules that could cost charities millions of pounds.
The Direct Marketing Association raised concerns last month that charities faced a “huge VAT time bomb” as a result of the new rules that could mean postage costs on direct mail are no longer zero-rated.
Many charities use “single sourcing” for direct mail, where they pay a single supplier to provide production and postage of marketing materials.
Production of printed materials is normally zero-rated, while postage is standard-rated. HMRC has historically agreed that when supplied together as a "composite supply" these services are both zero-rated.
Under zero rating rules suppliers do not charge any VAT on production of direct mail for charity, but can reclaim any VAT they paid to produce that mail.
The CTG said charities have raised concerns after a letter from HMRC sent to the DMA suggested the whole service, both production and postage, would be standard-rated, which would raise the cost of sending promotional material to supporters by 20 per cent and end up costing the sector millions of pounds.
It could also mean that charities that have not paid VAT on direct mail for the last two years could face backdated charges.
John Hemming, chair of the CTG (pictured) said: “We have sought urgent assurances from HMRC that no retrospective claims will be made against charities.
“If not, charities that have engaged in single sourcing since 2012 will be hit by a large VAT bill, despite acting in good faith and within the current HMRC guidance. One charity has estimated that it could face a VAT charge of up to £700,000.
“This would be a very unreasonable and unsatisfactory outcome and it is surely not the intention of the government to penalise the sector in this way. We are confident that we have presented a strong technical argument and are hopeful that this issue can be resolved at a policy level relatively quickly.”
The letter sets out a number of technical concerns about HMRC’s interpretation of existing VAT law and concludes that CTG does not agree with the taxman’s assertions.
“We do not believe it is satisfactory for VAT advice that deviates from the guidance and equates to new HMRC policy to be shared in this way, given the potential for panic and confusion. Clarity is urgently required in order to remove the uncertainty that charities are facing,” it says.
Peter Jenkins, the CTG’s VAT advisor, said: “We do not see how HMRC can establish a default rule as to whether there is a single or multiple supply and, if single, its nature and liability.
“HMRC appears to be adopting a new policy which assumes that a postal element in a supply of printed matter will always change the nature of the composite supply so that it becomes a composite supply of standard rated marketing services rather than of zero rated delivered goods.
“We believe that this is an incorrect interpretation of existing VAT law and HMRC’s own guidance. A full assessment of all the facts and circumstances is necessary in each case, including what is in the mind of the customer and whether elements of the supply merely facilitate its enjoyment. It will still depend on the individual contract – nothing has changed in that respect.”
