Royal Mail s International Signed For services. Licence modification proposal explanatory paper and statutory consultation

Transcription

1 Royal Mail s International Signed For services Licence modification proposal explanatory paper and statutory consultation November 2010

2 Summary 1. In light of the proposal by Her Majesty s Revenue and Customs ( HMRC ) to change the VAT legislation applicable to postal services, Postcomm is proposing to modify Royal Mail s licence to clarify that Royal Mail s International Signed For Packet service is a universal service product when sold with single piece air mail and surface mail services to destinations outside the UK. This clarification is required to ensure that the Postal Services Directive s requirements relating to the provision of registered services for cross-border mail are given effect in a manner consistent with the intended application of the VAT exemption for public postal services. 2. This paper explains the reasons for the proposed modification, which gives clearer effect to Postcomm s June 2004 decision on services which are required to be provided as universal services. It is accompanied by a formal Notice of proposed licence modifications. The consultation on the modification to Royal Mail s licence closes on 21 December Background 3. Royal Mail Group Limited ( Royal Mail ) is authorised by a licence granted by the Postal Services Commission ( Postcomm ) to provide postal services in the United Kingdom. The licence was granted under the Postal Services Act 2000 ( the Act ) and it may be modified under the provisions of the Act. 4. Under the terms of its licence Royal Mail is required to provide a universal postal service. This means that Royal Mail must provide a daily delivery to the home or premises of every person in the United Kingdom and a daily collection from every letter box and post office in the United Kingdom; it must provide a service of conveying letters and packets between collection and delivery points and the incidental services of receiving, collecting, sorting and delivering letters and packets. 5. In addition Royal Mail s universal service licence obligation requires the provision of international services, which means that it must arrange for letters and packets to be conveyed to overseas countries and delivered by universal service providers in those countries and it must receive letters and packets from universal service providers in other countries and deliver them in the United Kingdom. 2

3 6. These licence obligations give effect to the requirement in the Postal Services Directive 1 for the universal service to cover cross-border, as well as national, services Standards, procedures and requirements for the provision of international postal services are determined by the Universal Postal Union which publishes and regularly updates them in a document called the Letter Post Manual. Article 13 in Section E to the current edition of that Manual 3 provides Supplementary services 1 Member countries shall ensure the provision of the following mandatory supplementary services: 1.1 registration service for outbound priority and airmail letter-post items; 1.2 registration service for outbound non-priority and surface letter-post items to destinations for which there is no priority or airmail service; 1.3 registration service for all inbound letter-post items. 2 The provision of a registration service for outbound non-priority and surface letter-post items to destinations for which there is a priority or airmail service shall be optional. 8. In accordance with paragraphs 1.1 and 1.2 in Article 13 of the Letter Post Manual, Royal Mail s Successor Postal Services Company Overseas Letter Post Scheme 2001 (as amended) 4, which is made under section 89 of the Act, sets out the terms of two International Signed For services. These services are: International Signed For Pack, meaning a prepaid outgoing postal packet consisting of a specially designed plastic envelope provided by the Post Office, use of which indicates the desire of the sender that the packet should receive accelerated treatment within the United Kingdom and the destination country and that the packet shall be signed for by the recipient in the destination country, and International Signed For Packet, meaning a prepaid outgoing postal packet bearing a special label to indicate the desire of the sender that the packet shall be signed for by the recipient in the destination country. 9. Royal Mail describes International Signed For Packet as the registration service for priority and non-priority letter post items and International Signed For Pack as a way of obtaining the International Signed For service using pre-paid stationery. 1 Directive 97/67/EC as amended by Directives 2002/39/EC and 2008/6/EC. 2 Directive, Article Berne Available at 3

4 10. Postcomm regards the ISF Packet service as being provided as part of Royal Mail s universal service obligation. When Postcomm reviewed the services that are required as part of the universal service in it specifically referred to International Signed For services (for single piece mail items) being provided as part of the universal service requirement for international outbound services 5. This is consistent with the Directive s requirements that the universal service must cover cross border services 6. However, International Signed For Packet services are not referred to in Condition 2 of Royal Mail s licence as services which must be provided in the discharge of Royal Mail s universal service obligation. This was not an issue at the time but it is a gap in the formal definition of the universal service in Royal Mail s licence which now has potential implications for the VAT treatment of these services. 11. In addition Royal Mail provides a Contract International Signed For service for bulk mail, outside the provisions of its Overseas Letter Post Scheme. This service is described by Royal Mail as follows: It is available to all worldwide destinations with standard compensation covering up to 100 times the price of the First Class fee (currently 41) or the content value, whichever is lower. There is also the added option of extra compensation of up to 500 ( 250 for some destinations) upon request. 12. For the avoidance of doubt, Royal Mail s International Signed For service for bulk mail is not regarded as a universal service and this situation is not affected by the matters explained in this paper. References to International Signed For services in the remainder of this paper are to International Signed For Services provided for single piece mail items. Value Added Tax (VAT) 13. Until recently all postal services provided by Royal Mail were treated as being exempt from VAT because Royal Mail was regarded as the public postal services, the term used to define the exemption for the purpose of EU law on VAT. This state of affairs was challenged by TNT Post UK Ltd, which brought proceedings against HM Revenue and Customs ( HMRC ) in a case which was referred to the European Court of Justice 7. The case involved the interpretation of the exemption in Article 13A(1)(a) of the Sixth VAT Directive77/388. The Court gave judgment on 23rd April 2009 and ruled that the exemption applies to the supply by the public postal services acting as such that is, in their capacity as an operator who undertakes to provide all or part of the universal postal service in a Member State of services other than passenger transport 5 Postcomm Decision document: The UK s universal postal service, June 2004, paragraph 2.22(v) page 11 and page Article 3.7 taken with the last indent of Article R (TNT Post UK Ltd) v HMRC, Case C-357/07. 4

5 and telecommunications services, and the supply of goods incidental thereto. It does not apply to supplies of services or of goods incidental thereto for which the terms have been individually negotiated. 14. The government is in the process of enacting legislation to implement this ruling, which will come into effect on 31 January The legislation provides for the continuation of the exemption from VAT for the supply of public postal services by a universal service provider. The term public postal services, in relation to a universal service provider, means any postal services which the provider is required to provide in the discharge of a licence duty 9. The legislation also provides that, where the price of the relevant service is not controlled by or under a licence, in order for the service to be a public postal service, it must nevertheless be required by the licence to be available to persons generally at the same price. 15. are not set out in its licence and without intervention will become liable to VAT at the standard rate (though mail addressed to non-eu destinations is and will remain zero-rated). This gives rise to complications. For example, the International Signed For services themselves could become liable to VAT as they are neither USO services pursuant to the list of services in Licence Condition 2(3) nor Regulated Services which are subject to a price control under the licence; and whilst the underlying international services with which the International Signed For services are purchased may remain VAT exempt when purchased alone (and if there is no element of negotiation), they will cease to be exempt if purchased with the signed for services. 16. We are not aware of any other services offered by Royal Mail which are considered to be universal services, but have the potential to not be formally exempted as a result of the way the licence is drafted. Customer impact 17. Royal Mail has told Postcomm that it believes that the customers most affected by these changes would be social customers who are not registered for VAT. They will have to pay 20% more both for the signed for service and for the airmail or surface mail services used with it. Based on current prices these customers would also face a tariff anomaly in that it would be more expensive for them to send an Airmail letter or 100g Airmail packet with an International 8 HMRC Budget 2010 bulletin BN 41 dated 22 June Clause 22(2), Note (2). 5

6 Signed For additional service to Europe than it would be to send it to a rest of the world destination. 18. Customers buying an International Signed For service via the meter channel could also be affected. Standard meters do not collect enough information about the products purchased to enable Royal Mail to establish the amount of VAT which it would be required to pay to HMRC in order to comply with its obligations under VAT legislation. Royal Mail therefore has been considering how to address this. We understand that owing to the technical limitations of standard meter machines, certain products 10 which would become liable to VAT from 31 January 2011, will only be available through smart meters and no longer available through standard meters (as the standard meters will not carry prices that include VAT). This would be likely to include International Signed For services and would limit the availability of important postal services for SME 11 customers using meters. 19. Royal Mail has suggested that this adverse impact on customers could be avoided, and the expectation that this product be exempt from VAT could be met, by amending its licence so that its International Signed For Packet service is required to be provided as a universal service. The International Signed For Packet service then would be exempt from VAT because it is part of the public postal services as that term is expected to be defined in the VAT Act We understand that Royal Mail considers that the International Signed For Pack service would be exempt from VAT under the terms of HMRC s Technical Note as a supply of incidental goods. If the Finance Bill is not passed in its present form, we consider that such a licence amendment would nevertheless remain appropriate. Postcomm s decision 20. Postcomm notes that Royal Mail carried approximately 50 million 12 worth of public tariff International Signed for items in Approximately 60% of this went to EU destinations and therefore could become subject to VAT. Postcomm also notes that its policy position, that the universal service should include International Signed For services, was clearly stated at the conclusion of its 2004 consultation, even though these services were not mentioned in Condition 2 of Royal Mail s licence. 10 Includes Special Delivery by 9am, Special Delivery Next Day when bought with a Saturday Guarantee, Special Delivery Next Day when bought with Consequential Loss, Single Business Collections, Airsure and Standard Parcels with additional compensation. For further details see 11 Small and Medium Sized Enterprise. 12 Revenue from ISF service only and does not include the associated international product revenue. 6

7 21. Postcomm considers that a modification which will give greater clarity in Royal Mail s licence as to the services required to be provided to ensure compliance with the Postal Services Directive, and accordingly also ensures consistency with the UK s proposed implementation of the VAT Directive in light of the Court s judgment, ought to be uncontroversial. Such a modification would also avoid unnecessarily complicated tariffs for consumers and it would relieve Royal Mail of the need to make urgent and potentially costly changes to its single piece international product portfolio. 22. Postcomm therefore considers that modification of Royal Mail s licence so as to require it to provide the International Signed For Packet service as part of the universal service obligation should be proposed, as requested by Royal Mail. Given the terms of the Postal Services Directive there is a need to fill the gap in the Commission s implementation of its 2004 decision on the universal service which has become apparent in the light of HMRC s proposals. Licence modification notice and representations 23. In order to modify Royal Mail s licence as proposed in this paper, Postcomm is required to issue a notice in accordance with section 14 of the Act. That Notice accompanies this paper. The Notice sets out the detail of the change which will be made to the licence, subject to receiving Royal Mail s formal consent and to consideration of any representations made in response to the proposal. 24. Because Postcomm believes that the proposal should not be controversial, and because it relates to an issue on which its policy was clearly settled some time ago, the consultation period has been set at 28 days from the date of issue of the Notice. 25. Representations in response to the Notice should be sent by post to Caroline Longman Postcomm Hercules House 6 Hercules Road London SE1 7DB or may be sent by to Consult.responses@psc.gov.uk. 26. In accordance with its usual practice Postcomm will publish all representations it receives on its website unless respondents want them to be kept confidential. If you want all or part of your response to be kept confidential, or if you are 7

8 content for your response to be made public but want your identity to be kept confidential, please make this clear in writing in your response. 27. If you want to discuss any aspect of this paper with Postcomm please contact Caroline Longman on

9 POSTCOMM (The Postal Services Commission) Postal Services Act 2000 Section 14 NOTICE of proposal to modify the conditions of the licence granted to ROYAL MAIL GROUP LIMITED November

10 Whereas POSTCOMM (The Postal Services Commission) Postal services act 2000 Section 14 NOTICE of proposal to modify the conditions of the licence granted to ROYAL MAIL GROUP LIMITED (1) Royal Mail Group Limited, registered in England and Wales as company number and having its registered office at 100 Victoria Embankment London EC4Y 0HQ ( Royal Mail ) is the holder of a licence granted on 23 March 2001 ( the Licence ) under section 11 of the Postal Services Act 2000 ( the Act ) by the Postal Services Commission ( Postcomm ). (2) The conditions of the Licence were modified, most recently on 27 September (3) In light of proposals by Her Majesty s Revenue and Customs to alter the legislation under which universal postal services may be exempted from Value Added Tax Postcomm considers it appropriate to modify the conditions of the Licence to clarify the status as a universal service product of Royal Mail s International Signed For Packet service. (4) Postcomm has decided to propose modifying the conditions of the Licence in the manner set out in this Notice. Postcomm therefore gives notice, in accordance with section 14 of the Act, as follows 1 Subject to consideration of representations made in accordance with this notice and not withdrawn Postcomm proposes to make the modifications to the conditions of the Licence set out in the Schedule to this Notice. 2. The reasons for the proposed modifications are that Postcomm has concluded that the modification of the conditions of the Licence in the manner proposed in this Notice will, by clarifying its June

11 decision on services to be provided as universal services contribute to greater clarity on compliance with the Postal Services Directive and ensure the correct VAT treatment of Royal Mail s International Signed For service as a universal postal service as previously identified, and as a result, social and small business users will continue to be able to receive an International Signed For service which is subject to an uncomplicated tariff which is exempt from VAT, as explained in the explanatory paper which is published with this Notice. 3. Representations may be made in relation to the proposed modifications in the period commencing on the date of this Notice and ending at 5.00pm on 21 December Representations should be sent by post to Caroline Longman Postcomm Hercules House 6 Hercules Road London SE1 7DB or by to Consult.responses@psc.gov.uk 5. Except where the context requires otherwise, words and expressions used in this Notice shall be construed in the same way as in the Act. The seal of Postcomm hereunto affixed is authenticated by Tim Brown 23 November 2010 Chief Executive Authorised for that purpose by the Commission 11

12 Schedule Of proposed modifications to the conditions of the Licence of Royal Mail Group Limited In paragraph 3 in Condition 2 in Part 2 of Schedule 2 to the Licence 1 at the end of sub-paragraph (a) delete and, 2 re-number the existing sub-paragraph (b) as sub-paragraph (c), and 3 after sub-paragraph (a) insert the following sub-paragraph (b) provide the International Signed For Packet service described in the Licensee s Successor Postal Services Company Overseas Letter Post Scheme 2001 (as amended to 1 November 2010), and. End of Schedule 12