Royal Mail facing VAT showdown

Five private mail companies are preparing to take the Treasury to court over its pledge to preserve Royal Mail's special VAT-free status.

Five private mail companies are preparing to take the Treasury to court over its pledge to preserve Royal Mail's special VAT-free status.

TNT, the Dutch courier company, will front the challenge, which could end up in the European Court of Justice. TNT is supported by Hays, Deutsche Post, UK Mail and Express Dairies, which is also looking to expand into post deliveries.

The companies believe they are unable to compete with the state-owned Royal Mail on equal terms because they must charge 17.5 per cent VAT on deliveries. "This creates an uneven playing field," said Angus Russell, TNT's legal adviser. "We must bite the bullet and challenge this. TNT will take the lead."

Mr Russell said that Royal Mail's VAT-free status is illegal under a 1977 European tax directive. This states that VAT must be applied equally to all companies.

The five private mail companies are due to raise the issue with the Treasury and the Department of Trade and Industry in the coming weeks. The companies are then expected to take their case to the Customs & Excise VAT tribunal, Mr Russell said. If the case is thrown out, they will launch a challenge through the European Court of Justice.

The Treasury is expected to dig in its heels. A spokesman said: "Ministers have made it clear that they are opposed to VAT on postage."

However, the Treasury will come under further pressure to harmonise VAT rates on postage from Postcomm, the regulator.

It is preparing to recommend to ministers that a special VAT rate of 5 per cent should be introduced on all postal companies, including Royal Mail. This would lead to a penny increase in the price of stamps.

The European Commission is also pressing member states to harmonise VAT rates. The commission is expected to press the issue before the end of the year.

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