Does the Paragon VAT tribunal change the rules for direct mail?

A recent First Tier Tribunal case which HMRC lost has created a lot of chatter in the industry. The tendency in these situations is for commentators to cherry-pick the snippets that make for a great headline.

As is always the case with these matters, the devil is in the detail.

The detail is a thirty-seven page legal document. Fear not. Here is a handy little summary for you.

The case involved Paragon Customers Communications Ltd (‘Paragon’) and supplies made to their customer Direct Line Insurance Services (‘DLIS’). The supplies were limited to two matters:

  • The supply of printed mail packs and postage
  • The supply of “personalised booklets”

The dispute

Paragon treated the above supplies as a single supply of zero rated goods. HMRC contended that they were a single supply of standard rated services. Further, HMRC contended that the packs were not zero-rated because Paragon had incorrectly determined the VAT liability of the printed matter.

HMRC’s stance in this case is consistent with the revised guidance they published in 2015. VAT Notice 700/24: postage, delivery services and direct marketing.

They were following the policy outlined in Paragraph 3.3 Direct Marketing. This essentially says that when printed matter and certain services (e.g. postage) are provided as a single supply, it is no longer a supply of goods, but of services.

This revised guidance has been the subject of much industry commentary both prior to and after publication. It is this policy which has driven much change in the industry regarding how postage and other services are procured. For example, the increased use of Royal Mail agency agreements.

The tribunal findings

In considering the nature of the supply, the Tax Tribunal decided that this contract was a single supply of goods. They decided that ‘receiving and confirming data, printing, stapling and enveloping’ were ancillary elements necessary to produce the finished printed matter.

In other words they disagreed with elements of HMRC’s current policy regarding the supply of printed matter and certain services, notably postage.

The Tax Tribunal said this was an ‘incidental expense’ and formed a single supply with the print. However the Tax Tribunal went on to say there was a ‘fine line’ between this and postage being a separate supply.

It is important to recognise that the supply of print and postage was specific to a contract which Paragon had with DLIS for “on demand” fulfilment. The mailpacks were produced in relatively small quantities on a daily basis in response to the receipt of customer data.

This is distinct from bulk marketing mailings where the apportionment of cost between print and postage may be materially different. When postage is a significant proportion of the overall cost is it truly an ‘incidental’ charge for packing or transport? It is for the courts not us or HMRC to decide this.

What happens next?

First Tier Tax Tribunal decisions do not form precedents. The First Tier Tax Tribunal makes decisions on individual cases and endeavours to be consistent. There are numerous examples of it reaching different conclusions in cases which to us may look very similar.

Importantly, HMRC are free to regard this decision as an exception which does not apply to other suppliers. Alternatively they can try to overturn the ruling by appealing to the Upper Tribunal.

Paragon was represented by one of the UK’s leading VAT barristers. For HMRC, the decision about single sourcing print and postage flies in the face of current HMRC policy for direct marketing.

If neither side is willing to concede defeat until all court opportunities have been exhausted, there are likely to be several court cases to go before this matter is finally decided.

This case is not a green light to bundle postage and other services with print in order to zero rate the whole supply.

Feel free to contact us at any time. We’ll be glad to help.

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Register to avoid penalties

Fulfilment House Due Diligence Scheme

The term “fulfilment house” may receive some publicity over the coming year. This is because certain fulfilment houses must start registering with HMRC. These are not fulfilment houses which are normally part of the direct marketing supply chain however because of the potential for confusion we thought it necessary to make you aware of the scheme.

The fulfilment houses which must register with HMRC are those meeting the following criteria:

a) They provide storage for goods imported from outside the EU;
b) These goods are owned by (or on behalf of) a person established outside the EU;
c) These goods are offered for sale in the UK; and
d) Due to these arrangements buyers do not pay VAT.

The new mandatory registration scheme is to thwart tax avoidance arrangements described by HMRC as follows:

‘Non-EU traders who sell goods…to UK consumers, mainly via online marketplaces, are not always paying the correct VAT and duty to HMRC. These goods are normally shipped to the UK prior to sale and stored in fulfilment houses close to their final delivery point’.

Further information is available at

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Dealing with imports after Brexit

March 2019 is when the UK is due to leave the European Union and there is still much to be decided.

Nowadays it is very straightforward to buy goods from a business in the EU. An order is placed and the goods shipped to the UK. It is more difficult when buying from a business outside the EU because of the need to submit Customs declarations.

A hard Brexit will make it more difficult to trade with other EU businesses. This is because goods bought from businesses in the EU will then be ‘imports’ in the same way as a purchase from say China is an import.

If goods bought from other EU countries must be dealt with as ‘imports’ the Chartered Institute of Taxation says the likely consequences are as follows:

‘This is a significant shift for business in terms of cash flow, system, processes, supply chain efficiency etc. Cross border movement of goods will require import VAT to be paid and import declarations will need to be made, typically import VAT can then be reclaimed, so businesses will need to obtain the relevant evidence in order to secure a refund – unless simplifications are in place. The reality of this is cost and time – both financially and administratively.’

If this is the outcome, the Chartered Institute of Taxation estimates that the number of customs’ declarations will rise ‘from 50 million to 300 million’. This creates a major processing and logistical problem for HMRC and many doubt that HMRC are capable of getting all the necessary systems and people operational by March 2019.

This is one of the reasons why there is much talk of the need for a transitional period.

The EU is proposing a transitional period of 21 months during which not much would change for businesses. During the transitional period trade with other EU countries would continue as before and in particular without the need for customs’ declarations. However this comes at a price.

The price proposed by the EU is that the UK will continue to pay its contributions to the EU budget, accept the EU laws but have no input into the making of these laws, continue to accept free movement of people etc.

The EU has published it views of what happens in the event of the EU and UK not reaching a negotiated settlement before 29th March 2019. The views are in a press statement available at

In the brief the EU says that ‘Unless a ratified withdrawal agreement establishes another date, the United Kingdom will become a ‘third country’ as of 30 March 2019…’.

The EU go on to say what this means in practice. For example they say without a withdrawal agreement ‘Goods…brought into the customs territory of the EU from the United Kingdom or are to be taken out …to the United Kingdom are subject to customs supervision …This implies that customs formalities apply…’

Whilst all this is going on the EU continues to plan VAT changes for 2019 and 2021.

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The Bluefrog Blog

You may have seen this recent blog article or other posts related to it:

Why I had to close Bluefrog down (and why I set up Bluefrog Fundraising)

We thought it would be helpful to pass on our observations as we know there has been some confusion about the content of the blog.

We have no reason to doubt it has not been written in good faith and is a fair representation of the customers’ experience with HMRC. It does however contain statements which are inaccurate or open to misinterpretation.

With reference to the following paragraphs:

“The whole idea of a package test was completely changed. Under the new interpretation, as an agency, if you provide a service to a charity that is subject to VAT, it is subject to VAT – no arguments. This means things like creating an ad or a mailing pack need VAT charged on them at the standard rate.”

The “package test” is a method for determining the VAT status of packages of printed matter. Most direct mail packs fall within the scope of the package test. Nothing at all has changed regarding the rules or application of the package test therefore this statement is incorrect. Furthermore, charity advertising and mail packs which meet appropriate criteria may be zero rated. The blog author makes a generalised statement that such supplies are always subject to VAT which is not the case.

“The good news for charities is that the onus to pay any wrongly assessed VAT falls to the supplier.”

This statement could be construed as meaning charities are immune to any retrospective VAT charges. Whilst it is true that the repayment of VAT arrears rests with the supplier, that does not mean the supplier will not attempt to recoup the VAT from their clients. They may indeed have a contract clause that allows them to do just that.

‘”We simply could not afford to pay the sums owing…The company never received the VAT payments that HMRC wanted to reclaim.”

Unable to pay the sums owing, Bluefrog Ltd ceased trading and now there is Bluefrog Fundraising. Changes like this are commonly called ‘phoenixing’. Use this link for more information.

We trust this clarifies matters should any of your customers raise questions arising from this article. Please feel free to contact us for further information.

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Agency Agreements – suppliers beware!

In 2015 HMRC provided guidance for businesses who had incorrectly accounted for VAT on supplies of printed matter and postage. These terms were published by HMRC in Revenue and Customs Brief 10 2015. VAT Notice 700/24: postage, delivery charges and direct marketing, was also updated to reflect HMRC’s policy on supplies of printed matter and marketing services.

Recently it has come to our attention that some suppliers may still be incorrectly accounting for VAT on supplies of printed matter and postage.

According to their circumstances and the arrangements which they make, organisations are able to purchase VAT exempt postal services. The two ways in which this can be done are as follows:

1) Direct Access
Customers who meet the minimum requirements in terms of volume of mail and operating standards may contract directly with Royal Mail Wholesale and buy postage which is exempt from VAT.

2) Agency Agreements
An alternative method is for a customer to enter into a contractual arrangement with a licenced postal operator or intermediary (the agent), who themselves have a Direct Access Contract with Royal Mail Wholesale. In effect this is a tri-partite arrangement between Royal Mail wholesale, the agent and the customer.

  • The agent invoices the customer for the upstream postal costs. “Upstream” refers to the cost of picking up the bulk mail from the mailing house and delivering it in to the Royal Mail’s inward mail centres. This is a VAT standard rated supply.
  • Royal Mail invoices the customer for downstream postal costs. “Downstream” refers to processing mail in the inward mail centres, onward distribution to local postal sorting offices, and end delivery to individual households. This is a VAT exempt supply.

In summary, the agency agreement allows the customer to not pay VAT on the downstream costs. If the customer was to deal directly with Royal Mail for the services as a retail customer, they would be charged VAT. Organisations who are unable to reclaim part or all of their VAT costs, such as charities and financial institutions, find these the agency agreements an effective method to mitigate VAT on postal costs.

Suppliers with an agency agreement who are not the end customer

We are aware of a variation on the agency agreement arrangements where suppliers for example a printer, mailing house or agency, are the holders of the agency agreement.

The basis of these arrangements is as follows:

  • The licensed postal operator will act as agent for the supplier
  • The supplier signs an Agency Customer Contract
  • Royal Mail invoice the supplier for downstream postal services, which are VAT exempt. The supplier pay these invoices.
  • The licensed postal operator invoices the supplier for upstream postal services, which are VAT standard rated. The supplier pays these invoices.
  • The supplier treats the downstream costs as a disbursement and passes them on to their own customer (e.g. a charity or financial institution) without charging VAT.

We are concerned that when doing this suppliers cannot comply with HMRC’s strict rules for disbursements.

The disbursement rules

The requirements to meet the VAT disbursement criteria are substantial and specific. It is incorrect to think that as long as the exact costs are passed on this will suffice. Instead several conditions must be complied with before HMRC will accept there is a disbursement.

The conditions that must be met for HMRC to accept that the charge from the agent to the principal can be treated as a disbursement (or pass-through cost) are;

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

HMRC has advised us that suppliers considering an agency agreement would not meet all the disbursement conditions. In particular HMRC noted who, according to an agency agreement, is liable to pay Royal Mail. This is the supplier rather than the ultimate client. In addition, the supplier would be acting as a principal and not an agent of its client.

Infringing HMRC’s strict disbursement rules

When HMRC do not accept that the downstream costs are a disbursement the financial consequences are potentially serious for any Member who uses an agency agreement for this purpose. HMRC will then regard this as not disbursement but as a supply of postage to the client. This is a standard rated supply of services to the client which when print is also supplied HMRC will categorise as a standard rated direct marketing service.

In an attempt to save a customer VAT on postage the member is exposed to VAT liabilities on both the postage and the print. Therefore we would strongly recommend you obtain professional advice before using agency agreements to treat postage costs as a disbursement. If you should require any further information please contact us.

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Update to Notice 701/10

HMRC have published a new version of VAT Notice 701/10: zero-rating of books and other printed matter.

If you are unsure about the significance of the changes in the new version then please contact us for further advice.

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Charity Update

HMRC have published a new version of VAT Notice 701/58: charity advertising and goods connected with collecting donations.

If you are unsure about the significance of the changes in the new version then please contact us for further advice.

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What does Brexit mean for VAT?

Every member of the European Union (‘EU’) has VAT. It is a condition of membership.

After leaving the EU the UK is not bound to have VAT. It could abolish it. If this were to happen the UK would be going against a worldwide trend as VAT has spread to countries outside the EU. This is because VAT raises a lot of money.

In the UK, VAT raises about 17% (£120bn) of government revenue. As it is collects so much tax for the Exchequer it is difficult to believe any government will get rid of it. It seems more likely that VAT will continue in the UK even after we leave the EU.

Like all EU members the UK must have VAT rules which are consistent with the over-arching EU laws. The EU laws set parameters within in which the UK is free to change the rates of VAT and to alter to some extent how it applies. The parameters were agreed by the EU VAT committee in which the UK played a very active role.

After leaving, the UK should be able to amend in any way it likes the VAT laws applying here. For example after leaving the EU the UK will unilaterally be able to apply a different rate of VAT to existing goods or services. However life may not be so simple.

Trading with businesses in other EU countries has never been simpler. This is due to the single market. What happens about this will be major part of the leaving settlement agreed with the EU.

Some third party countries have access to the single market (eg Norway and Switzerland) however this comes with conditions. Some examples which we have read and heard about include monetary fees, free movement of people etc. Further, the EU normally insists that the third party country has VAT conditions. Without this there will not an agreement and the third party country will not get access to the single market.

The time allocated for reaching an exit settlement with the EU is two years. The two years start from when the UK formally applies to leave. Whilst the UK is negotiating an exit agreement VAT is unlikely to change significantly. There are some good reasons for thinking this.

The exit negotiations will be very involved and most probably fraught whilst both sides struggle to get the best deal. Making changes during this period to UK VAT laws which infringe EU legislation would likely antagonise the other countries making some very difficult negotiations even more difficult.

In summary, we do not expect there to be any material changes to VAT while the UK continues to be part of the EU.

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VAT Single Sourcing…(again)

It was hoped that the updates to VAT Notices 700/24 and 701/10 would bring some much needed clarity to the direct marketing industry and allow everyone to move forward on an even footing.

The revised version of VAT Notice 700/24 advises that:

‘Where..(marketing related services) are supplied with printed matter as a single supply, then that is taxable at the standard rate, as it is a supply of direct marketing services. Where the printed matter and any services are supplied separately then that may comprise multiple supplies and each component is taxed according to its VAT liability.’

This guidance infers that print supplied with marketing services can be EITHER a single or multiple supply depending on the individual facts in each case. Since 1 August 2015 many firms have relied on this guidance to continue to supply print and other services, treating them as multiple supplies for VAT purposes. In practice, it would appear that HMRC’s Compliance Team is taking the default position to categorise these as a ‘single supply’ and that contrary to the guidance quoted above, HMRC will not readily accept the supply of print and other services can be a multiple supply.

This matter is of concern to us all because it is likely that industry suppliers are succumbing to HMRC pressure and, for supplies made since 1 August 2015, charging VAT on both the print and other services.

HMRC should use the facts in each case to decide whether a single or multiple supply exists. The start point for such matters should be to identify the customer’s expectation. In the customer’s mind were they receiving a single over-arching supply of marketing services or separate component parts. Often the contract or brief will be a pointer to the customer’s expectation.

HMRC advise that the following list of indicators suggest that a transaction is a multiple supply (though do not provide conclusive proof)
• Separate pricing or invoicing
• Components are available separately
• There is a time differential between parts of the supply
• Components are not interdependent/connected

We, industry bodies, and other taxation professionals continue to lobby HMRC about these matters. If you are in any doubt if your supplies are affected you should seek professional advice.

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Budget 2016 – Isle of Man charities

The government will legislate to ensure charities subject to the jurisdiction of the High Court of the Isle of Man are capable of qualifying for UK VAT charity reliefs. (Finance Bill 2016).

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