The Direct Marketing Association ('DMA') tells us that it has received a letter from HMRC in response to its query concerning the VAT treatment of supplies by direct mailing fulfilment houses ('fulfilment houses') to clients such as charities and financial service providers. This has brought the unwelcome news that HMRC thinks the service is fully standard rated, and that the assumption that the end-to-end service involving a zero rated 'package' is fully zero rated does not conform with their policy. The reasoning provided is described below:
Traditional approach
Charities wishing to send printed marketing/fund-raising
materials to potential donors commonly ask a fulfilment house to
design and produce a package which qualifies to be wholly zero
rated on the basis of the contents being either wholly or
predominantly zero rated. The fulfilment house is then asked to
ensure that these packs are sent to selected recipients. It uses a
delivery service provider to achieve this. The delivery service is
subject to VAT, but the fulfilment house pays it to the delivery
provider, reclaims the VAT, and sells a fully inclusive
'delivered goods' service to the charity, which it
zero-rates. The reasoning is that the postal service is merely a
means of ensuring that the zero rated package gets to the location
which the charity requires. This means that there is no VAT on the
underlying costs of the provision of this supply.
Whilst case law and the implication of the contents of HMRC's
Notice seems to substantiate this traditional treatment, the DMA
was concerned that the position was not spelt out explicitly
enough. It therefore asked HMRC to confirm that this treatment was
applicable, and commenced that enquiry in 2012 when VAT began
regularly to be charged on the relevant postal services. After a
long wait of two years, HMRC has written to the DMA confirming a
totally different point of view.
HMRC's new interpretation
Whilst the DMA does not publish all of the HMRC letter, nor its
original query, it appears from what they have told us that HMRC
does not accept that the supply is one of 'delivered goods'
such as can be zero rated. HMRC justifies this negative viewpoint
by saying that 'the supply is not a composite supply of goods
to your customer, but is a supply of services as the
'goods' are sent directly to the recipient rather than to
your customer'. This appears to draw a distinction between the
normal situation with 'delivered goods', where the customer
himself receives the goods, and the situation where the customer
directs that goods be sent to other parties. This seems to be
irrelevant in light of HMRC's published policy that the
position can be regarded in the same way, whether or not delivery
is to the actual customer, and can be treated accordingly if
delivered to the customer's customer. Whilst, in the case of
recipients of advertising material, it is a moot point as to
whether that person is a 'customer', this surely is an
immaterial distinction and the important point is that the goods
can be delivered anywhere at the behest of the true customer and
still be 'delivered goods'.
HMRC goes on to say that: 'even if the supply consists of
different elements such as printed material and postage, one
element is not ancillary to another because they are both essential
to the overall aim of the contract'. This appears to assert
that the general zero rated nature of the products being delivered
cannot determine the treatment of the postal element because the
act of posting material to the recipient is (to use their own
words) 'at least as important as the printed material
element'. We find this a remarkable comment. The sole purpose
of the delivery is to ensure that the printed material reaches the
recipient. It is obvious, we think, that the postal service is
entirely subservient to the goods being delivered, and does not
have a free-standing purpose of its own.
All of this would be alarming enough if the analysis was that there
were two separate supplies, one of zero rated printed material, and
one of the delivery service which happens to be standard rated. But
HMRC then comments (without the clarity one would wish) that:
'the nature of the supply has changed and so it cannot take the
same VAT liability [as the printed material]. As this supply does
not fall within the zero or reduced rate, the whole supply must be
taxed at the standard rate of VAT.' That reference to 'the
whole supply' seems to indicate that VAT applies also to the
production of the zero rated printed material.
Our views on HMRC's approach
HMRC's approach would appear intended to levy VAT on a supply which has generally been treated, hitherto, as completely zero rated. It seems to us that this lacks any justification. As mentioned above, the delivery is subservient to the products which are being delivered. HMRC seeks to characterise this as a general marketing supply, whereas this fails to take into consideration the fact that the objective supply is one of materials to be delivered to the customer's contacts. Whilst the overarching purpose for the charity may be to advertise a fund-raising campaign, we think that this fails to deal sufficiently with the actual supply being delivered by the fulfilment house, and seeks to re-characterise it by reference to some overarching subjective purpose. It also appears to us to depart from the well known precedent set by Plantiflor (STC 1132) which determined that a recharge of postal services for delivery of goods could not be a disbursement if the supplier was responsible for ensuring that the products were actually delivered to any given address, and that the supply was one of delivered goods.
Impact on Fulfilment House
The DMA, unsurprisingly, has warned its members that they may
face difficulties. As HMRC has couched its views in terms of a
clarification of its policy, it does not say that it will draw a
line in regard to past transactions. In situations where a charity
has entered into a contract which allows the fulfilment house to
add VAT where applicable (which is likely to be the case), the
fulfilment house can revert to the charity to make good the
difference and potentially even to seek recompense for any
penalties that may be levied.
Charities should resist the requirement to make good such
liabilities on the basis that HMRC's opinion is challengeable.
As to how that challenge will arise, this depends on whether a test
case can be brought forward, either by a recipient of the service
or, more likely, by a provider. It is to the benefit of both the
charity and financial services sectors in particular (not to
mention education, health, and care) that a unified opposition is
made to HMRC and that the direct mailing industry is encouraged as
far as possible to co-operate.
Charities may find that their contract does not allow the
fulfilment house to add VAT, and they should take advice on all of
their contracts to see if they can resist the imposition of VAT on
a retrospective basis under the contract. Whilst this may seem
unfair on the fulfilment house, a charity is obliged not to pay
more for the service than it has contracted to do, and therefore
ought not to take the view that it wishes to 'help out' a
fulfilment house unless it has very good reasons based on its
charitable purposes.
How we can help
As mentioned above, we can review contracts to see if a provider has the legal ability to transfer the liability to the charity. Further, we can consider the details of the contractual arrangements and the practical arrangements between the parties, to determine the strength of any opposition to HMRC's point of view. If there are aspects in the arrangements as currently configured which may be adjusted to improve the chances of success (from the date of adjustment onward), we will advise on how to achieve this. We encourage clients to deal with this proactively and not to delay until they face a dispute with a provider.
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.