It’s a common misapprehension that all postage is exempt from VAT. However, the position is much more complicated than that, and businesses have to be aware of the correct position in order to avoid getting into trouble with HMRC.
The basic position is that posting letters or parcels with the Royal Mail Group Plc (Post Office) is exempt from VAT, but that does not apply to businesses recharging those costs.
Any other courier or delivery costs charged by delivery companies other than the Post Office are subject to VAT at the standard rate.
However, even some Post Office delivery charges are subject to VAT when they are individually negotiated, following the ECJ decision in TNT Post UK Ltd (Case C-357/07).
Making a delivery charge
Many businesses make a charge for delivery goods, and in many cases the delivery is undertaken by the Post Office and the costs incurred by the business are exempt from VAT – so what should the business charge its customer?
HMRC take the view that there are two separate supplies: the supply by the Post Office to the business, which is exempt from VAT; and the supply of delivered goods by the business to its customer.
When a business is making a supply of delivered goods, they are making a single ‘composite supply’ and the liability of the postage charges follows that of the goods.
Example 1 - VAT on delivery charge
I run a mail order business, and supply three DVDs to a customer in the UK. I make a delivery charge of £3.00.
The sale of the DVDs is a standard rated supply, so I have to charge VAT on the £3.00 delivery charge, even though I did not get charged VAT on the delivery.
Example 2 - Zero-rated delivery charge
A customer in Norway orders three DVDs with a delivery charge of £3.00.
The sale of the DVDs is zero-rated, as it is an export to a customer outside the EU, so the delivery charge is also zero-rated.
Trap:
If a business is contractually liable to deliver the goods, the above rules apply. However, if the supplier has no contractual obligation to deliver the goods but undertakes the delivery as a separate contract, the delivery charge is always standard rated, no matter what the liability of the goods.
Claiming VAT on postage
A business that orders delivered goods will incur VAT on the postage if the goods are standard rated, and will be able to reclaim that VAT as part of a cost of its business.
Businesses that supply delivered goods and use the Post Office for delivery will normally not be charged VAT, so there will be no VAT to reclaim. However, where other courier and delivery companies are used then VAT will be charged, and that VAT can be reclaimed in the normal way.
Disbursements
Some businesses try and argue that the postage costs are a disbursement, and not subject to VAT. However, this is not the case – the postage is a component cost of the supply and not a separate supply to the customer that is paid for by the business. Typically, professional services firms have tried to argue that postage is a disbursement and not subject to VAT, but this is not the case.
Practical Tip:
If your business supplies delivered goods ,the postage charge follows the liability of goods, even if the postage you pay is exempt from VAT. VAT incured on delivery charges can be reclaimed as a normal business expence.
