Watchdog presses Treasury to put VAT on postage stamps

The Treasury is to come under pressure to introduce VAT on postage stamps in the run-up to the next general election.

The Treasury is to come under pressure to introduce VAT on postage stamps in the run-up to the next general election.

Postcomm, the postal regulator, is preparing to recommend that a special 5 per cent rate should be introduced, but this will go against the wishes of Government ministers, who are opposed to any increase in the price of stamps.

Royal Mail is VAT exempt. However, The private companies entering the postal market have to charge the tax at the full 17.5 per cent rate.

Postcomm is worried that this gives Royal Mail a competitive advantage when bidding to handle mail for companies which are themselves exempt from VAT. Because they are unable to claim back the tax, charities, banks, building societies and the Government tend to use Royal Mail for their deliveries.

Postcomm has asked Royal Mail and the private companies for their views, but the regulator has made it clear to the industry that introducing a 5 per cent tax is one of its favoured options. If the Government accepts the proposals then it is likely to lead to a penny increase on the price of a stamp.

Only the Chancellor, Gordon Brown, has the power to introduce the tax. A Treasury spokesman said: "We are opposed to VAT on stamps. But we are also supportive of the moves to open up the post market on a level playing field. So we will continue to monitor the VAT position as competition emerges."

Royal Mail is against the tax. It is expected to tell Postcomm that it should retain its special VAT status because of its obligation to deliver post to unprofitable parts of the country.

Alan Goddard, the UK managing director of Deutsche Post, said: "Royal Mail's VAT-free status is a barrier to business as it creates an un-level playing field. It is a major problem for us when competing for business."

The European Commission is also pressing countries to harmonise VAT on post. But it is yet to publish a formal directive.