Will HM Revenue and Customs (HMRC) stamp out VAT postal claims?

Following the recent TNT VAT case, if your business has 'individually negotiated' prices for postal services with the Royal Mail, there may be scope for a retrospective VAT claim

What was the TNT case about?

Postal and delivery services provided by the Royal Mail have historically been treated as exempt for VAT purposes. However, TNT Post UK Limited  took the view that the VAT exemptions afforded to the Royal Mail gave it an unfair competitive advantage. The position was challenged by TNT in the European Court of Justice (ECJ).

Although TNT lost its case, the ECJ took the opportunity to clarify the extent of the Royal Mail's exemption. The Court confirmed that VAT exemption was restricted to the provision of 'universal postal services', and therefore individually negotiated postal and delivery services are subject to VAT.

How can I benefit ?

The decision means that there is now an opportunity for businesses to recover VAT on the monies paid to the Royal Mail in the past for individually negotiated services. Any claim opportunity would be subject to the contractual arrangements entered into with the Royal Mail, and in particular whether there was any reference to VAT in the contract.

Where a claim is possible, it could be made for the VAT on relevant costs in the last three to four years.

What about earlier years?

It may also be possible to extend claims beyond that period - in principle back to the commencement of VAT in 1973. These extended claims may be possible because;

• there is on-going litigation challenging the validity of the three year cap for claims (the case of Scottish Equitable)
• new VAT rules relating to VAT invoices may also enable claims to extend beyond the three/four year time limit
  Will I be charged VAT in the future?

The ECJ's decision means that businesses will in future incur VAT on postal rates that have been individually negotiated. If the terms of an existing contract preclude the addition of the tax from a current date, any VAT cost to the business will be deferred until the contract expires or is re-negotiated. Where VAT can be added to the price agreed, it will be a cash flow cost to businesses that can recover all of the VAT that they incur (subject to the normal rules).

For businesses that cannot recover all of their VAT, the tax will represent an additional 'real' cost. Those businesses should review their commercial arrangements without delay, as it may be possible to mitigate the impact of the new VAT cost.

Mike Sheppard, VAT Partner at Grant Thornton says: "It remains to be seen whether the Scottish Equitable case will reach the Courts, and if so what the outcome will be. In addition, the wording of the new VAT rules is far from clear, and several aspects involving the receipt and use of invoices requires clarification. However despite the uncertainty surrounding these two issues for extended claims, there will still be scope to submit claims for the past three to four years. Where the amounts are significant businesses should consider compiling and lodging protective claims with HMRC."

He continues "It is possible that HMRC will resist any suggestion that refunds of this type are due, and further litigation on the specific point may be necessary. However, HMRC has taken a similar stance on other issues recently, before making substantial refunds to taxpayers. It is therefore vital for businesses to act quickly to protect their positions and so maximise the potential amount of any claim."

Please contact us if you would like further advice on any of the above.