20 November 2009 - HM Revenue & Customs (HMRC) has told Royal Mail that it will need to start charging VAT on some of its service, but an exemption for junk mail will remain in place.
The decision by HMRC follows a ruling by the European Court of Justice in a case brought by TNT Post. Royal Mail's main rival argued successfully that Royal Mail should not be exempt from charging VAT when trying to win "commercial contracts subject to a competitive tendering process".
The ruling does not apply to ordinary first and second class mail and 'direct mail' because the prices for these services are subject to approval from Postcomm, the regulator for postal services in the UK. Under European Union law, publicly owned postal operators are still exempt from having to charge VAT on services which are not subject to competition.
Although the decision is unlikely to make it more difficult for Royal Mail to win contracts from business customers, as most of them are VAT-registered and able to reclaim the tax, industry analysts are concerned that the ruling may bring the abolishment of other tax exemptions a step closer. The European Commission is currently looking into whether or not public postal services should continue to be exempt from VAT at all and will have followed the case closely. Alan Pearce of the accountancy firm Blick Rothenberg told the Independent that the ruling "could be the spark that leads to a change in EU law to withdraw the VAT exemption for all public postal services".
The VAT charges are unlikely to be introduced before the start of the new year. Royal Mail has not yet commented on HMRC's decision.