Regulator urges end to Royal Mail's VAT-exempt status

Higher postal prices were in prospect yesterday after the industry regulator Postcomm called for Royal Mail to start charging value-added tax.

In a consultative document the regulator said that Royal Mail's VAT-exempt status distorted competition with private postal operators, who are required to charge VAT at 17.5 per cent, and should be "reviewed as a priority, with the aim of levelling the playing field".

Rival operators welcomed the announcement but cautioned that any change to Royal Mail's VAT status would have to be approved by the Treasury and would require primary legislation.

Postcomm stressed that if the Royal Mail's VAT-exempt status were abolished, it would not necessarily result in stamp prices rising by 17.5 per cent overnight. The aim would be to set it at a rate, probably in lower single figures, which was "revenue neutral".

Because Royal Mail is VAT-exempt, it cannot claim back the VAT it pays on bought-in goods such as vehicles. Postcomm's preference is to set the tax at a rate that allows Royal Mail to absorb any increase in prices from the savings it makes in its own VAT bill.

However, the Treasury is likely to be concerned at an overall loss of tax revenues if VAT on postal services is set at a lower rate. In a letter last year to a group of private postal operators led by UK Mail, TPG, Hays and Deutsche Post, the Treasury said it would require an EU directive for national postal operators to start charging VAT and this could take years. However, Postcomm pointed out that Brussels had already suggested member states could set rates of VAT for their own postal networks.

The requirement for private postal operators to levy VAT has frozen them out of the bulk mail market in financial services, worth an estimated £700m a year, because banks cannot reclaim the VAT they would have to pay. Andy Barrett, of Deutsche Post in the UK, said: "This is good news for us because Royal Mail's VAT-exempt status has prevented us competing directly with it."

Postcomm's move on VAT is part of a review of Royal Mail's "special privileges" under its chairman Allan Leighton. These include exemption from London's congestion charge and immunity to prosecution for carrying prohibited items.

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