One of Royal Mail’s biggest rivals has won the right to launch a legal challenge over the state group’s exemption from VAT.

TNT has been granted permission to apply for a judicial review of the exemption, which it said impedes competition in the postal market because other operators have to charge VAT.

TNT’s legal challenge comes as the European Commission is also looking at Britain’s operation of VAT exemption, along with the systems used by Germany and Sweden.

VAT is a crucial issue for Royal Mail’s competitors because banks and charities, which are large bulk mailers, are also VAT-exempt and so cannot recover VAT charges. TNT says that the financial groups and charities make up about 40 per cent of the postal market.

Nick Wells, of TNT Post, said: “This VAT distortion is subject to possible infringement proceedings by the European Commission. TNT Post is committed to providing its customers with an efficient and value-for-money service and will continue to fight for a level competitive playing field.”

The European VAT directive allows governments to exempt former monopolies from VAT, although the legislation was drafted before the liberalisation of many postal markets.

The other main rival to Royal Mail – UK Mail – has secured a deal with the state group so that it acts as an agent for Royal Mail in the work that it carries out for clients.

This arrangement means that it can benefit from Royal Mail’s VAT-exempt status for the “downstream” part of the delivery work, which Royal Mail still carries out because it conducts the final-mile delivery for its rivals under access agreements.

UK Mail, therefore, has only to charge VAT on the collecting and sorting work that it carries out. This represents about 3p-4p of the 16p-17p cost of delivering an item of mail.

TNT’s move to judicial review comes after a lengthy battle with HM Revenue and Customs over Royal Mail’s VAT status.

Postwatch, the postal consumers’ group, says it wants equal treatment for all postal groups in regard to VAT. A spokesman said: “We want to see a level playing field – although we won’t necessarily be advocating everyone charging VAT, in the interests of the consumer. Establishing an intermediate level of 5 per cent could be a solution, but it is hard to see that happening.”

A spokesman for Royal Mail said: “VAT on postage is something we don’t want to see. It would mean higher stamp prices and higher charges for our customers who are not VAT registered, such as banks and charities.”

The European Commission’s investigation into the VAT treatment of national post operators by the UK, Germany and Sweden is an attempt to establish a common practice across Europe. Britain and Germany both allow VAT exemption but Sweden does not.

A final decision on TNT’s legal move is not expected until the middle of 2009. If the appeal is successful, enforcement would be expected by the following year.

In the post

August 2004 TNT wins Customs & Excise ruling allowing it VAT exemption on Royal Mail’s “final mile” delivery charge

January 2006 HM Revenue & Customs reverses ruling on the day the postal market is fully liberalised

April 2006TNT challenges ruling reversal and asks High Court to rule on legality of UK VAT laws

May 2007 TNT given permission to apply for judicial review

May 2007 High Court expected to decide that European Court of Justice (ECJ) must adjudicate

Summer of 2009ECJ expected to reach a decision

2010Changes to VAT laws if the ECJ has ruled in TNT’s favour

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