The Fundraiser - Practical advice and insight for the charity sector

Posted in Opinion Direct Marketing

Beat tax changes: send direct mail campaigns now


Karen Pritchard, product director at Millennium Data, advises charities to send out direct mail campaigns in June and July while they can still afford to.

As everyone in the third sector will know, along with 'Marmite Clear', HMRC made a fool out of April the first. It was of course supposed to be the day the the tax man removed VAT exemption for charities on some parts of the direct mail supply chain, a deferred date from October 2014. It ultimately means that services such as the delivery of direct mail, which were previously zero-rated, become standard rated, potentially costing the sector millions in additional tax payments.

Despite pressure from the direct marketing trade association (DMA) and The Charity Tax Group, no guidance was forthcoming from HMRC and charities were left directionless and unclear as to the charges that apply. Until now (allegedly).

Last week the tax man made a non-committal announcement that the new rules wouldnít be implemented until at least 1 August 2015. It also stated that if it fails to publish the updated VAT notices by then, the implementation date might well be revised again. However, the good news for charities is that HMRC will take no retrospective action against organisations that apply VAT incorrectly to their direct mail campaigns before 31 July 2015.

The changes means that charities that use a single supplier to print and deliver a direct mail campaign will now have pay standard rate tax on both services. Before the changes, the delivery element - which should have been standard rated - was subsumed into the zero rated supply of printed matter. This meant that the whole supply was zero rated and the charity paid no VAT, saving it thousands of pounds per direct mail campaign.

However, there is still a way for charities to save money on tax on the delivery of campaigns by taking advantage of Royal Mail downstream access. This means that the campaign is delivered by Royal Mail, but the sorting and transport is done by a third party supplier (possibly the printer). The downstream access is VAT exempt and if the third party makes these arrangements this exempt element is invoiced as a VAT-free disbursement. However, the problem with this solution is that Royal Mail applies hefty minimal mail quantities for downstream access, and hence small charities with small mailing volumes will be the ones to suffer.

In essence, this means that a large number of organisations are going to be liable to pay standard-rate tax. It will therefore pay to activate a campaign before 1 August, as DMA estimates that the changes in tax status could make a piece of direct mail up to 20p more expensive. For some charities this will make the medium of direct mail - currently one of the most effective and cost efficient forms of fundraising and donor retention - untenable, and it is likely that digital channels will become more popular.

Karen Pritchard is product director at Millennium Data

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