Charities have been left waiting to hear how HMRC intends to treat Direct Mail for VAT purposes, with many fearing the results. This leaves many charities facing huge bills, and unable to afford to carry out an essential fundraising activity.
The Direct Mail Association has approached HMRC for a definitive answer on whether Direct Mail (DM) is going to be treated as an activity which is liable for VAT.
If the fears prove to be correct, and VAT is applied to DM activity, many charities will face a painful choice between cutting back on fundraising activity or trying to find the money for a large VAT bill.
DM is viewed by many charities as an absolutely essential activity and a core part of their overall fundraising strategy.
The Fundraising Standards Board confirmed that nearly half of all charities that report to them – 47% – were using Direct Mail to raise money.
However, out of the major charities, those that raise more than £10million every year, the results were even more startling, with 100% using DM.
The question mark over VAT application on DM arises because many charities use an approach known as “single sourcing”. This means that a specified supplier is used to both produce and post marketing materials.
In the past, VAT has not been charged on these activities because it was assessed as being primarily a printing activity, with the postage only an ancillary expense.
Until now, no VAT has been due thanks to a HMRC rule which explicitly states that VAT will not apply if a business opts to pay for another company to deliver its products on its behalf.
However, since 2012 charities have been required to pay VAT on postage, due at the standard rate of 20%. This VAT bill, which could total as much as £18million per year, has been avoided by many by using single sourcing.
But this could all be changing as the Direct Marketing Association (DMA) says it has been told by HMRC that the entire single sourcing activity will now become chargeable, with 20% VAT due on both the production and the postage.
The DMA says it will be lobbying the Treasury and also business ministers in a bid to stop businesses being slapped with back charges and penalties to cover the period while the sector waited for clarification.
The managing director of MarketReach, Jonathan Harman, urged HMRC to work in collaboration with the mail industry to support the “vital sector”.
Mr. Harman admitted that the Royal Mail – of which MarketReach is their DM support unit – would be “concerned” about the possibility of increases in mailing costs for charities and whether they would be able to meet the VAT expense.
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