UK stores that don't charge VAT on postage

[PCW]

In my innocence I thought VAT had to be added to the shipping charge if the goods being sold were VATable.

 

I recently treated myself to a new 'toy' from Hattons and was surprised to see on their invoice that VAT had been added to the loco, then they added the shipping,but no VAT to the shipping.

 

So with a  £4 shipping charge I appear to have made a saving of £0.80, this is splendid, I can put that towards my next vitally important purchase

 

A little more worrying is that if Hattons are indeed supposed to be paying the government 80p VAT on every standard £4 shipping charge will they get a big bill from HMRC?  Oh dear, I hope they have a large jar they keep throwing an 80p coin in every time they pack a parcel.

 

Can anyone enlighten me, are the shops applying VAT to the shipping (like most do) diddling us, or is Hattons allegedly/potentially diddling HMRC?  Or perhaps it's sort of optional, collect the tax if you want to support the government, don't collect it if you don't?

 

Does anyone know of other shops who charge VAT on the goods but not on the shipping?

 

 

[Suzie]

Some royal mail shipping methods do not have VAT on them which can be useful. The Royal Mail website identifies those that don't (second class letter for example) and those that do (Parcelforce for example).

 

Take a look here:-

 

http://www.royalmail.com/price-finder

[Mike at C&M]

We don't add VAT on postage by Royal Mail, as it is not there.

 

Where we do pay postage on shipping is those parcels sent by express services from Parcelforce, such as "Parcel 24" or "Parcel 48" - I don't know the reasoning why. However, we can get a VAT receipt from the Post Office, and reclaim this VAT on our quarterly returns.

[Mad McCann]

He doesn't charge VAT on you taking it home yourself either; such a reasonable trader! :-)

[PCW]

My understanding is that whilst Royal Mail aren't required to charge VAT on some types of their service a retailer 'selling on' the postage has to add the VAT to the postage charge if the goods being shipped are VATable. So for example a bookseller wouldn't have to add VAT to the postage as printed material is not VATable, but a seller of trains should add VAT to the postage because trains are VATable.

 

So, I believe if anyone takes something to the Post Office for ordinary mail they quite rightly don't pay VAT. but if a model shop uses Royal Mail they don't pay the Post office any VAT but should charge the customer VAT and would thus pay all the VAT to HMRC. The retailer is 'selling on' the postage as added value.

 

I'd hate to think of some hard working independent retailer getting a VAT inspection followed by a rude awakening with a large bill?

[Mike at C&M]

Postage is considered an expense within our business, and what we charge reduces that expense within our accounts.

 

Therefore, we do not consider postage to be a sales receipt, and as a result it is not subjected to the addition of VAT.

[BG John]

https://www.gov.uk/government/publications/vat-notice-70024-postage-and-delivery-charges/vat-notice-70024-postage-and-delivery-charges

Paragraphs 1.4 and 2.3, but maybe not written in the plainest and most unambiguous English! I'm rather rusty on VAT, so am not sure if it's changed over the years.

 

1.4 Aren’t postal charges exempt from VAT?

Postal services provided by the Post Office are exempt from VAT, but this exemption does not extend to similar services provided by other suppliers, even where this might be seen as being in direct competition with the Post Office. However, if any delivery charge you make to your own customers includes the cost of stamps you buy from the Post Office you may have to charge VAT on the whole amount including the cost of those stamps.

 

2.3 What if I have to deliver the goods and I make a charge for this?

The important test is whether delivery is included in the contract. You are making a single supply of delivered goods if, under the contract, you have to deliver the goods to a place specified by the customer. This might include the customer’s:

• own address
• friends or relatives
• their own customers

The position is not affected by whether the charge you make for delivery is separately itemised or invoiced to the customer. In either case there is a single supply for which the VAT liability is based on the liability of the goods being delivered. For example, any element of the price attributed to the doorstep delivery of milk and newspapers will also be zero rated. On the other hand any element attributed to the delivery of standard rated mail order goods will be standard rated.

[PCW]

Thanks BG John, that supports my layman's understanding of the situation.

 

So are we saying the like of Hattons not charging VAT on the shipping are to the best of our beliefs doing it wrong and could be vulnerable if they had a VAT inspection? Blimy, you wouldn't expect a business that size to get it wrong, I wonder how far back HMRC can go when calculating what is owed from previous under calculations. All a bit scary!

[Mike at C&M]

PCW,

   As with all legislation, there is a lot of detail to be considered. It is wrong to assume that Hattons are dealing with postage/carriage incorrectly and I would suspect that they have been advised on how to deal with this, and acted accordingly.

 

  I have re-read the VAT notice referred to by BG John, and I am happy that because of the way that we deal with the postage charges, we do not have charge VAT on to the customer for parcels we send out by Royal Mail.

[BG John]

They don't show the VAT on the invoice, but that doesn't mean they don't account for it. The £4 charge would be VAT inclusive anyway, like all the prices they advertise. Only their accounts department, auditors, and a VAT inspector would know if they account for it properly. It may be that the invoice layout hasn't been set up to show it, although that means it doesn't comply with the rules, but then I bet there's a list of companies as long as your arm who don't produce VAT invoices correctly!. From the way the discussion was going, I assumed they just weren't charging VAT on Royal Mail postage, but I checked my invoices, and it shows up in the same way on Yodel deliveries as well as Royal Mail ones. I doubt if they're not accounting for it correctly,

[PCW]

I think we will have to agree to differ on this one 87029.

 

It is right for me to carefully look at the instructions, refer to professionals and take their advice, and then form my own opinion.

 

Likewise it is right for you go through the same process and form your own opinion.

 

Of course different professional advisors may have different opinions, no doubt HMRC have their own opinions irrespective of what we might think!

[PCW]

Lets hope this is the case BG John, as a  rough back of an envelope calculation on what I can only guess their throughput to be would suggest at 80p a parcel a bill for £0.5 million if HMRC went back for 5 or 6 years! 

[Mike at C&M]

The VAT notice referred to by BG John in post 7 includes the following section:

"3.2 Can I treat the postal charges as disbursements?

In this section references to “Royal Mail” include other operators licensed by Postcomm. In these circumstances you can treat Royal Mail charges as a disbursement for VAT purposes provided the following conditions are all met:
•you meet the general disbursement requirements outlined in the section on “Supplies made by or through agents: other situations” in Notice 700 The VAT Guide
•your clients tell you who to send the mail to or have access to the mailing list before the mail is sent out
•your responsibility for the mail ceases when it is accepted for safe delivery by Royal Mail, and
•you pass on any Royal Mail discount or rebate to your clients in full or, if you obtain the discount or rebate from posting various clients’ mail at the same time, you apportion it fairly between them

All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes."

 

For those who not have the volume of mail order sales, Royal Mail is the default, as we are not in a position to negotiate contracts with other couriers for large numbers of parcels handled.

 

It is possible to not pay VAT on postage charges, if you deal with your deliveries in the approved way.

[mevaman]

As a Chartered Accountant, I have looked into this for another retailer.

 

All businesses that are VAT registered must charge VAT on all services that they provide and this includes P&P. The postage input costs that you pay for as a business may be non-VATable but any charge that you then levy into a customer must be subject to VAT. Remember that this charge often has to cover packing materials, labour and profit as well as the pure input cost.

 

Therefore, Hattons should charge VAT on the £4 and this must be reflected in the invoice. As it isn't they are in breach of the law.

 

If I were a VAT inspector, I would be looking at this straightaway.

 

87029 - I would check this with your accountant!

 

Sorry, if I am a bearer of bad news.

[raymw]

If the amount is less than £250.00 there is no requirement to show VAT on the invoice, even though it is being paid to the seller.https://www.gov.uk/vat-record-keeping/vat-invoices

[Mike at C&M]

mevaman,

   Thank you for your posting. I have e-mailed my accountants for their thoughts on this matter, referring to the relevant VAT notice, this thread and their knowledge of how I deal with postage through my accounts.

   I will report back once they get back to me.

 

Mike

[mevaman]

raymw

 

You are correct as a 'simplified' invoice can be issued on amounts under £250. However, for most IT systems it is easiest to just issue one type of invoice if you are charging various amounts which may or may not exceed £250.

 

The 'simplified' invoice was introduced for, generally, small businesses who are raising low value invoices.

 

In any event, regardless of whether a 'simplified' invoice is used or not, VAT must be charged and accounted for on a VAT return.

 

It could be worth checking if anyone has a Hattons invoice for more than £250 and whether the VAT figure is 20% of the net price including postage. If it isn't then there is a problem.

 

Hope that this helps.

 

I may find that I am barred from buying anything from Hattons if this goes further!!

[Mike at C&M]

mevaman,

 

Like me, you probably curse the number of 'grey' areas that legislation brings. This is obviously one, and in recent weeks we have had the newly introduced changes on VAT where prompt payment discounts are offered - this seems to have brought us as many different ways that people deal with it, as we have suppliers who are affected, and here I am sure that one of the big companies has got this very wrong!

 

I would far rather have a definitive way of doing things, without having to worry that what I might consider to be correct, may be wrong in the eyes of HMRC.

 

.... and if Hattons do bar you, I am sure that there are several retailers who frequent this forum who would welcome your business.

[BG John]

It could be worth checking if anyone has a Hattons invoice for more than £250 and whether the VAT figure is 20% of the net price including postage. If it isn't then there is a problem.

My biggest invoice is £236.53 including VAT! But I'd have thought a system that changes the way invoices are printed when they go over a certain amount was a bit ridiculous. On all my invoices, each product item has the net, VAT and gross amount, with the Goods Total also showing three figures. But the delivery charge is just added as one figure of £4, with no VAT breakdown. The wording on the one I'm looking at is "Yodel Home 24 with tracking & SMS delivery arrival notification", so definitely attracts both input and output VAT.

 

As I said earlier, it doesn't mean they don't account for VAT on the delivery charge, even though they don't show it on the invoice, but the way they print it appears to be wrong.

[PCW]

It will be interesting to see where this all goes.

 

As BG John mentioned it is possible Hattons are accounting for the VAT on the postage but 'just' churning out wrong invoices, so a few tweaks to their software should sort it. 

 

On the other hand if they genuinely have overlooked the need to charge the VAT on the postage then perhaps one result will be they need to move their standard postage charge from £4 to say £5.  I doubt they could swallow the extra cost as they must be getting squeezed from several directions at the moment, with the changes to Hornby terms a year or so ago etc.

 

As it appears some retailers are accounting for the VAT on postage and some are not then the ones who 'accidentally' are not are actually gaining an unfair advantage over their competitors who are doing it properly. Perhaps if the whole industry reviews this then at least a more level playing field should evolve, presumably this will be of some help to the smaller retailers who must find it hard to compete with Hattons etc.

[Cliff Williams]

My accountants advice matches Mevaman's advice.

If you are invoicing someone for a service that was zero rated then you have to add VAT to the figure, or include 1/6 of the postal amount charged to the customer as output VAT to HMRC.

 

My local Garage does not do MOTs but they are VAT registered. As the MOT (zero rated for VAT) is provided by a third party that he invoices me for I have to pay VAT on the MOT. He discounts the MOT so the final price is the same.

 

Likewise when I reclaim expenses for travelling such as flights I have to add VAT to the flights (zero rated) otherwise I will be out of pocket to HMRC

 

I seem to recall there was a test case a while back where the HMRC pursued this and won a case, but it was a while ago.

[raymw]

Think yourself lucky you're not running a corner shop - different VAT ratings on cigarettes, potato crisps, corn based 'crisps', the fun back then with 'jaffa cakes', magazines, magazines with cds attached, etc. Anyway, in the Hatton's situation, it is their problem, if any, not the customer's.  Also, postage, does not include packaging, and most likely they have a fixed 'postage' charge, absorbing the difference in the item price. Tower models offer 'post free' to UK, but say others are undercutting their prices and adding postal charges, so Tower are adding it all into the item price, so you are paying VAT on their postal chrages in any case. I would be surprised if hmrc want to interfere too much in that area.

[mevaman]

Dear all

 

A basic principle of VAT law is that the invoice or 'tax point' must reflect VAT correctly. As stated previously, this has been modified for 'simplified' invoices for amounts under £250. If Hattons are not correctly reflecting VAT on P&P on invoices over £250 this is unlawful, regardless of whether they account for it correctly or not.

 

Any customer of Hattons, who uses the purchase for a business activity (e.g for building a model railway in a nursery) cannot claim back the full amount of input VAT as the 'tax point' appears not to reflect it correctly.

 

If Hattons are not accounting for this correctly, they are saving 67p on every invoice with £4 P&P. This could be substantial for the largest model railway retailer in the UK.

 

For retailers who correctly account for VAT on P&P, Hattons may have an unfair advantage if this is the case.

 

Hope that this clarifies matters.

[raymw]

As mentioned earlier, if 'normal' royal mail postage to UK, then there is no VAT on the postal charges, Hattons neither pay, or receive payment for the VAT. Nothing wrong with their invoice in that case. However, if, they do not use Royal Mail (and this may be why they want to use Yodel), then they will be receiving a VAT invoice from Yodel, but not collecting VAT on the outgoings. HMRC would be interested in that, I suspect.

 

VAT is not the same as accounting - if an error is made on an invoice you pay/claim the stated VAT. If it is a regular error, not in the favour of HMRC, then they will go back through the last 4 years or more, and collect the outstanding amounts. Oddly enough they are not so concerned with errors that work in their favour.

 

I suppose, strictly speaking, postage should be separated from packaging (save a lot of nonsense on the fora with folk complaining that someone charged a couple of quid for P&P but only £1.50 worth of stamps on the package.

 

Best wishes,

 

Ray

 

fwiw, when I was VAT registered, I always found HMRC helpful (But the 'inspections' were a bit worrying). When I moved, about 28 years ago, the local office drew lots to pay the first visit - They thought 'Model Engineering' was something entirely different. (emphasis on 'Model' and not 'Engineering')

[PCW]

Sorry Raymw but I believe you are wrong.  See Mevaman's posts (as a chartered Accountant) and Cliff Williams' post advising his accountant confirms what Mevaman has to say.

 

To be clear:

 

1. The Post Office does not charge VAT on 'ordinary' post, so a retailer has no input tax to claim.

 

2. If the retailer sells items that are VATable, like trains, he has to charge VAT to he customer for the complete transaction, trains plus postage.

 

3. The retailer has to declare all this output tax on his VAT return and pay the full amount to HMRC. This does not cost the retailer anything as he has collected all the money from the customer.

 

4. If a retailer is actually not collecting VAT for HMRC on the shipping element of a sale he is allegedly acting illegally. Any such alleged illegal advantage might give him competitive advantage over other retailers who are acting legally.

 

 

Any discussion of costs and profits are irrelevant, the ONLY thing that matters is for VAT purposes postage is regarded as part of the overall retail sale, if the sale is of VATable goods you have to collect and pay to HMRC VAT on the postage part of your sale.

 

It doesn't matter if the postage charge reflects a profitable situation for the retailer or not, you can give all your trains away for free if you want (preferably to me!), including free delivery, but charge anything at all and VAT has to be accounted for if you are VAT registered.