Charities have been left unsure how to obey tax rules after HM Revenue & Customs failed to publish guidance explaining how it will implement changes in VAT on direct mail, the Charity Tax Group said today.

HMRC said last year that from the start of this month, charities would have to pay 20 per cent VAT on up to £400m of “single-sourcing” contracts for direct mail. Charities had previously believed these contracts were zero-rated for VAT.

HMRC has also said that it may retrospectively charge VAT, going back four years, for charities which it believes have not followed the rules. Charities originally expected that most direct mail activity would be exempt from this, but HMRC has since narrowed the exemption to exclude unaddressed mail – a significant proportion of charitable mailings.

The changes could cost charities tens of millions of pounds.

Rules unclear

The CTG, which campaigns for a better deal for charities on tax, said HMRC should have postponed the introduction of the new rules until it had produced guidance explaining them, but HMRC has refused to do so.

CTG said today that HMRC had promised to provide guidance well before these changes were introduced, so that charities could understand their obligations.

It said that HMRC produced draft guidance on 16 March which was shared with specialists. But that there was “factual inaccuracy” in the guidance and that it had several problems. That guidance has not been published.

HMRC is now unable to publish its guidance because it is in “purdah” – a pre-election period in which it cannot comment on policy – but has said it still expects charities to follow the new rules.

CTG said this has left charities forced to obey rules that they do not understand.

How the rules changes work

Charities spend £400m a year on direct mail, and at the moment many charities use “single-sourcing” contracts for direct mail, in which they pay one bill for both printing, sorting and delivery.

Print costs are zero-rated for VAT, and charities have previously claimed that the other services were “ancillary” to printing. They believe this meant they should pay no VAT on the whole production process.

However HMRC has said single-sourcing contracts should be standard-rated, meaning charities would have to pay VAT on the whole cost of production. It initially threatened to implement the change in October last year.

It said that standard rating for single sourcing was “existing policy” and not a change of position. Because of this it also threatened to charge this VAT retrospectively. However charities complained that these were new rules and had not previously been made clear despite repeated attempts to get clarification over the last few years.

After discussions with CTG and the Direct Marketing Association, HMRC agreed to postpone the implementation of the rules from 1 October 2014 until 1 April 2015. It also agreed a deal over retrospective charging, but CTG says it has reneged on this agreement.

CTG reaction

“Although HMRC stated it was aiming to issue revised guidance in the New Year, well in advance of the new implementation date, the draft guidance was only sent to CTG and the DMA on 16 March for comment by 20 March,” said John Hemming, chair of the CTG. “In response, CTG raised concerns both about the delay in producing guidance and also a number of outstanding problems with its content, including matters of factual inaccuracy, and called for a further postponement of the implementation date while these issues were addressed.”

Hemming said HMRC had responded by saying the position was clear and that it would make no further comment until after the election.

“In the meantime, HMRC expects charities and their suppliers to operate according to the new rules,” he said. “CTG regards this as highly unsatisfactory and believes that guidance is needed urgently and is pushing for an early meeting to resolve outstanding issues of concern.  

“The retrospective concession that we negotiated has been narrowed to exclude unaddressed mailings and data correction services – in direct contradiction to earlier promises.

“It is unsatisfactory that charities have to operate according to new rules from 1 April without formal notice from HMRC of their responsibilities.”

HMRC sent a letter to industry bodies in December, which CTG said it refers to as its confirmed position.

“In our view, HMRC should not seek to establish policy by means of letters to representative bodies, and then expect these bodies to publish HMRC guidance,” Hemming said. “Official HMRC communication channels should be used to disseminate policy.”

CTG has published an exchange of correspondence with HMRC in order to help its members understand the official position.