HMRC yesterday published updated versions of its guidance on VAT on direct mail in a move which the Charity Tax Group says will “provide certainty and clarity for charities”.
HMRC has changed its position on VAT and direct mail, which means many contracts which charities believed were zero-rated for VAT purposes are actually standard-rated. This means that up to £400m of charity direct mail could face additional VAT charges of 20 per cent.
However in addition to publishing guidance, HMRC has confirmed today that it will extend a transitional period during which it will not charge 20 per cent VAT on direct mail. This means its new rules will not apply to mail sent by charities before the end of July.
Its new guidance also addresses several technical concerns which could have led to HMRC backdating claims against many charity direct mail campaigns, sometimes for many years.
The change in the VAT rules concerns situations where charities pay for print and production of direct mail as part of a single contract, known as "single sourcing".
Printed matter is zero-rated for VAT purposes, and charities previously believed that a "single sourcing" contract involving a print element would also be zero-rated, because the other services were "ancillary" to printing.
However HMRC has said a "single sourcing" contract would actually be standard-rated, and even the print element would attract VAT.
HMRC said last year that 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 published updates today to both the VAT Notice: 701/10 zero-rating of books and other forms of printed matter and VAT Notice 700/24: postage and delivery charges.
The Charity Tax Group said that it welcomed the updates, as well as the confirmation that a transitional period during which the retrospection concession applies will therefore end on 31 July 2015.
John Hemming (pictured), chair of the Charity Tax Group, said: “We welcome the publication of this guidance and the confirmation that the transitional period has been extended to the end of July. This provides much needed certainty and clarity for charities.
“We are pleased that several of our technical concerns about the VAT treatment of direct mail from 1 August 2015 onwards (following the end of the transitional period) have now been met. There remain several outstanding issues relating to the exact scope of the retrospection concession, which will have important financial implications for charities, but, following a recent meeting with senior HMRC officials, we are hopeful for a favourable response shortly”.
The update follows an issue that arose in July 2014, after a letter was sent from HMRC to the Direct Marketing Association which outlined how direct mail should be treated for VAT purposes.
A series of letters were sent by HMRC to the Direct Mail Association and the Charity Tax Group where it was confirmed that they would be treated as a supply of standard rated direct marketing services, and it sought to implement the new arrangements by 1 October 2014.
Charities and direct mailing companies had sought clarification on the past and future VAT treatment of their direct mail arrangements and this led to representatives from CTG and the DMA meeting HMRC officials on a number of occasions over the past few months.
This led to an extension of the transitional period to 1 April 2015, and now, in this latest update, to 31 July 2015.
CTG said it was able to “persuade HMRC that it is possible to treat certain alterations to the customer address lists (known as “suppressions" for gone aways, deceased and mail preference) as ancillary to the zero rated supply of printed goods”.
