Royal Mail hits out at VAT plan

Royal Mail has delivered a damming verdict on plans to open up the postal market to competition, claiming that it will lead to an increase in the price of stamps.

The comments are directed at the regulator, Postcomm, which is thinking of levying VAT on postal companies.

Royal Mail, chaired by Allan Leighton, enjoys a VAT-free status, which gives it an advantage when bidding for mail contracts with organisations such as charities and financial services companies that are themselves exempt from the tax. Postcomm wants to end Royal Mail's special status and is preparing to recommend that the Treasury introduce a 5 per cent VAT rate for all postal companies.

But in a report to Postcomm, Royal Mail says consumers would lose. "It is unlikely that the vast majority of our customers, who would suffer a real price increase as a consequence of the introduction of VAT, would be impressed by the apparent conceptual strength of the 'level playing field' argument," says Royal Mail. "Liberalisation, which was intended to bring prices down, would lead to a real price increase for the vast majority of our customers."

If a 5 per cent VAT rate were introduced, Royal Mail would be able to offset some of the cost by recovering the tax in certain parts of its business, such as its van fleet. Therefore, customers would see prices rise by 2.5 per cent, or 1p on a first-class stamp.

Royal Mail also says the regulator would be failing in its duties if VAT were introduced. "Royal Mail observes that Postcomm's apparent trivialisation of the significance of the price increases ... is at odds with one of the major reasons for Postcomm's existence, which is to protect consumers from unnecessary prices rises," it says.

The Institute of Fundraising, an umbrella organisation for charities, has also written to Postcomm expressing concerns over the VAT proposal.