Changes in the VAT rules around direct mail fundraising which would have cost the charity sector tens of millions of pounds a year will not now be introduced until April 2015, the Charity Tax Group has said.

Earlier this year, HM Revenue & Customs said that “single-sourcing” contracts for direct mail should be standard-rated for VAT, meaning that charities would have to pay an extra 20 per cent on printing and production. Charities and suppliers had previously believed these contracts should be zero-rated for VAT.

The charity sector spends almost £400m on direct mail each year, and fundraising specialists said that a 20 per cent increase in costs would have destroyed the industry.

“Single sourcing” contracts involve a single supply of printing, sorting and delivery of direct mail and became more common for charities as a way of avoiding VAT after a decision that VAT was payable on contracts with Royal Mail for delivery services.

Printing services are zero-rated for VAT, and charities and suppliers believed, based on previous HMRC guidance, that if production and delivery were rolled in together with printing services, they would be “ancillary” to those printing services.

HMRC said in a letter to the Direct Mail Association earlier this year that charities’ interpretation of the rules was wrong. It later said that VAT would be due on these contracts from 1 October this year.

However the CTG and the DMA said today that following discussions with HMRC, the taxman had agreed to delay this to April 2015. The two bodies said HMRC has also promised it will not take retrospective action to punish charities for previous positions so long as those positions were based on “genuine misunderstandings”.

CTG said it had reached “broad agreement” with HMRC over when the printing and distributing of direct mail should be zero-rated, but that detailed guidance would be provided in the new year.

CTG believes charities should be able to introduce alternative VAT arrangements which mean that charities can avoid VAT on almost all of the costs of direct mail.

John Hemming, chairman of the CTG said:  “This is excellent news because it gives time for charities to put in place revised arrangements meeting the deadline of 1 April 2015 while minimising additional VAT costs.

"Ten of our members had calculated that their retrospective liability could have been as high as £6m. The impact for the whole sector would have been tens of millions."