Stamp Duty: The cost of postal pricing changes

Stamp Duty: The cost of postal

pricing changes Thursday 29 March 2012

#dmapost

Introduction

Mike Lordan, chief of operations, DMA

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What is changing and what does this

mean? Alex Walsh, DMA

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Background

• Postal Services Act 2000

– Set up Postcomm, Postwatch

– “universal service”

– Removal of monopoly

• Postal Services Act 2011

– Prepare for private ownership

• State Aid – pensions, loans

• Postcomm � Ofcom

• “Commercial return” on Universal

Service

OFCOM

• “Light touch” regulation

– Commercial freedom

– Ex ante�Ex post

– Protect the Universal Service

• Consultations

– Securing the Universal Postal

Service

– Review of Regulatory conditions

– Decisions published 27th March

What is changing?

Price control

•Postcomm formula

– Too complex

– Ineffective

•OFCOM decision

– No price control

– Except for 2nd class letters, some

packets

What is changing?Price Control - implications

•Royal Mail have commercial freedom

– “opportunity pricing” not cost related

– More scope for individual contracts, sales

etc

– Ability to negotiate?

•VAT

– HMRC rules state only exempt if

– Part of Universal Service

– Or subject to price control

What is changing?

Terms and conditionsUniversal service products eg

stamped and metered mail

3 months notice of price

changes

3 months notice of changes to

terms and conditions

Regulatory approval of “non

beneficial” changes

1 month’s notice of price

changes

1 month’s notice of price

changes

“Fair and reasonable” terms and

conditions for universal services

From 2nd April

Royal Mail “retail” eg products

bought directly from Royal Mail

including all bulk mail products

3 months notice of price changes

3 months notice of changes to

terms and conditions

Regulatory approval of “non

beneficial” changes

None

None

No requirement

What is changing?

Terms and conditions - implications

•Pricing changes could be more frequent

•Product specifications changed at short notice – “beneficial and non-beneficial”

•No formal appeals process

What is changing?

Return to sender•Currently in product specs but no requirement

•Chargeable option in future?

Quality of Service•No obligation to do this for services outside Universal service

•Will RM continue?

•Will they make public?

•Research and private monitoring?

Summary

• Postal Market very different after

April

– Scale and pace of change

• More complex but opportunities for

postal users

• Help and advice available

What can Royal Mail do for you?Mike Gibson, head of account management, Royal Mail

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Making sense of the changes…

• Twenty-five years of bulk mail product evolution

• Old-fashioned and complex product naming

• Substantial change across our operational estate

• Keeping mail relevant

Wh

y c

ha

ng

e?

A rejuvenated and simplified portfolio where

customers can choose which mail product by -

Application

1Attribute

2Price

3

Th

e G

oa

l

Advertising &

SustainablePublishing Business

Ap

pli

cati

on

Attributes

Format

Speed

Volume

Sortation

Machineability

Containerisation

Att

rib

ute

s

Sp

ee

d

Aim to deliver 90% of sorted 2nd Class by Day

C and 88% of Economy by Day E

• Two sortation levels instead of five

• Lower entry-levels for sorted products

• Choice of containers – trays, bags, ALPs

• Increase average items-per-selection for High Sort

• Single database known as Royal Mail Selection FilesSim

pli

fyin

g88Low Sort

1525High Sort

Sim

pli

fyin

g• Replace 3rd Class descriptor

with Economy (no indicia

changes!)

• Replace the CBC acronym with

Barcode (Intelligent to follow…)

• Only Advertising products will

attract the ABSOF levy

• Online Business Account will be

the only payment channel

• Payment of volume related

discounts on Residue items

Pro

du

ct C

ha

ng

es What’s going -

• Automated Standard Tariff Letter

• Mailsort 120, 700

• Mailsort 1400 Packets & A3

• Mailsort on Meters

• Walksort

What’s new -

• Machine-Readable Large Letter format for

Sorted and Unsorted including Polywrap

• Advertising Mail with a low-entry level

unsorted option and a packet option on High

Sort

Su

mm

ary

• Simpler to understand, better

quality of service and easier to use

• Migration Plan to help you with

change supported by a six week

grace period

• Big focus on keeping mail relevant

over the coming year

VAT- What’s changing and what can

you do to mitigate it?Paul Osborne, partner, Zero VAT LLP

Stephen Taylor, partner, Zero VAT LLP

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VAT Mitigation and Compliance

for the marketing and communications industry

Zero VAT: Partnership Credentials

• Members of the Direct Marketing Association

• Fellowship of the Institute of Direct & Digital Marketing

• Fellowship of the Chartered Institute of Taxation

• Member of Association of Taxation Technicians

• Authors of “Zero%” VAT assessment and compliance application

• Authors of the DMA Guide: VAT Mitigation & Compliance

• Advisors for the DMA VAT Helpline : [email protected]

VAT Mitigation on postage

Historically, postal users have been able to avoid paying VAT onRoyal Mail postal services by one of three methods:

• Supplies direct from Royal Mail which are VAT Exempt

• Supplies via an alternative postal provider with an agency agreement

• Suppliers treating postal costs as a disbursement

Royal Mail VAT ExemptionVAT exemption refers to supplies of commercial services which are not liable to VAT. This is different from zero rated supplies which are liable to VAT, albeit at a rate of 0%.

VAT Mitigation on postage: Future

• Most Royal Mail retail products will be liable to VAT

• Access agreements may continue for as long as applicable

Royal Mail wholesale products are VAT Exempt

• Disbursements for Royal Mail will no longer be relevant

Single Sourcing

Some businesses have raised the question of whether “single

sourcing” is a way for organisations to avoid VAT on postage.

The solution proposed being to treat postage as part of the

single supply of printed matter e.g. a direct mail pack. The logic

being that if the mail pack is zero rated, the postage follows the

liability of the pack because the postage is an “ancillary” cost.

What is the evidence against treating postage as an ancillary

cost?

Legal analysis

Card Protection Plan Ltd – determining single or multiple supplies

Are postage costs “ancillary”?

HMRC Published materials – VAT Notice 700/24

You are providing a service when:

• Delivering someone else’s goods

• Posting your client’s mail (e.g. publicity or advertising material)

The risks of treating postage as an ancillary cost

• Not supported by legal precedent

• Contrary to HMRC published information

• The VAT liability rests with the supplier

What if I have a written clearance from HMRC?

HMRC will not be bound by advice when :

• They were not fully aware of how it would be used

• Some relevant information was not given

• The ruling wasn’t unambiguous and without qualification

Refreshment breakPlease join us for tea and coffee

#dmapost

How can DSA competitors help you?Charles Neilson, group services director, TNT Post

Angus Russell, director of legal and corporate affairs, TNT Post

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Stamp Duty- The cost of Postal pricing changes

Charles Neilson, Group Services Director

TNT Post UK

In commercial confidence

Agenda

Downstream Access A rapid overview

OFCOM What are the material changes

VAT

Innovation

End to End delivery Aspirations


How the Downstream Access

Market Works


Mail Solutions

PremierSortA 2 or 3 day service for unsorted mail

machineable mail.

• From 250 items a collection

• Competitive pricing through access

to bulk mail discounts

PremierA 2 day service for pre sorted mail.

• Savings of 10%

• Later more convenient pick up times


Our customers


It’s not only the large posters…

No of items

0

50

100

150

200

250

300

350

400

450

500

550

600

650

0 - 1000 1001 - 5000 5001 - 10,000 10,001 - 200,000 200,001 - 2,000,000

Premiersort

Allsort

PremierCustomers

A typical day


Market declining , DSA Maturing

Source: Royal Mail, PostComm

Overall Market

Difficult to get exact data!

Ofcom use 16bn

DSA at 7.3bn

DSA at 46%

DSA Market

TNT Post shows good market

share growth and is at 50.7%

YoY absolute growth slowing

% Market Share - Quarterly

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

% TNT

% Non TNT

0

5

10

15

20

25

Volume (bn)

06/07

07/08

08/09

09/10

10/11

11/12

12/13

13/14

14/15

Year

Total UK addressed market

= DSA

+ = Total mail market

0

5

10

15

20

25

Volume (bn)

06/07

07/08

08/09

09/10

10/11

11/12

12/13

13/14

14/15

Year

Total UK addressed market

= DSA

+ = Total mail market


Agenda



VAT

Innovation



Ofcom The abridged version!

Decrease in the regulatory control of Royal Mail

Removal of all price caps except 2nd class stamps

Mandated Access to IMC for L and LL formats

Margin squeeze protection in D+2 market

Competition law protection in other areas

Packet terms need to be commercially agreed

Constraints on zonal pricing removed


Ofcom - Margin squeeze protection

Second class pre-sorted bulk mail

• Ex ante margin squeeze protection on 2nd class bulk L + LL format

• Royal Mail must cover adjusted fully allocated cost (“FAC”) of these

upstream activities

• Price floor per contract of 50% FAC

• Royal Mail to provide quarterly cost data to OFCOM

• Move to competition law margin squeeze test (LRIC) on

2nd class bulk mail possibly by April 2014?

Other services

• Competition law margin squeeze test (LRIC) on MS2 packets (new) and on

all other services (as currently)


Margin squeeze regulation change - illustration

Wholesale price of

14 pence – set by

regulation not costs

Minimum

discount

imposed by

regulator (based on

commercially

agreed

differential)

Retail minus

2006-11Wholesale plus

2011/12

Wholesale price of

16 pence – based

on estimated cost

Minimum

headroom(based on

estimated Royal

Mail upstream

costs)

Ave

4.1p

Wholesale plus

2012+

3p

Minimum

headroom(based on Royal

Mail upstream fully

allocated costs)

FAC

overall =

<2.5p?

LRIC per

contract

= 1.25p?

Wholesale price of

18 pence + X –

based on cost


Ofcom Zonal pricing

“Cost oriented” pricing to replace current

3% max increase / decrease

Detailed costing manual required and

monitored by OFCOM

Different (and implicitly additional)

zones will be possible but zones can

only be grouped together based on

similar unit costs

Changes expected April 2013 and

possibly the main charging principle for

Access going forward?


Agenda



VAT

Innovation



Current VAT structures

Condition 9 agreement (C9 Agreement)

Customers contract directly with their postal provider for both Upstream (collection to IMC) and downstream service (IMC to delivery)

VAT is payable on both elements

Customer Direct Access Agreement (CDA Agreement)

Customers contract with their provider for upstream activity and pay VAT on this element

Customers contract directly with RM for their downstream activity and do not pay VAT on this part

Agency Agreement (Agency Agreement)

Mix of the two above. Customer appoints postal provider to act as their agent in dealing with RM.

Subsequently upstream incurs VAT

Downstream activity VAT free as a disbursement


VAT – what will change?

Under current VAT law, the OFCOM proposals would likely mean:-

All USO services remain exempt (i.e. 1st and 2nd class stamped and meter mail and any single item PPI service)

Royal Mail’s non-USO retail services taxed at 20% (including all bulk mail services)

Mandated Downstream Access services remain exempt i.e. D+2 access for letters and large letters

Commercially offered access services taxed at 20% e.g. all D+1

access and D+2 packets access


RM VAT – what the rules will say

1. Provided under a USO

or Access condition? 20% VAT

No

2. Is it price controlled?

Yes

No

Yes

3. Non-price terms

freely negotiated?

Yes

2A. Must be

offered

to persons

generally

at the same price?

3A. Must be offered

to persons

generally on the

same terms?

No

No

Exempt

No

Yes

Yes


RM VAT – what the rules should say

1. Is the service

in the USO? 20% VAT

No

Yes

Exempt


Agenda



VAT

Innovation



Product Innovation

greengreengreengreenPostPostPostPost

Buzzmonitoring


Digital and Mail

Transactional mail continues to decline as a result of e solutions

Mail competes with other media in the communications budget

BUT…

Email marketing is most effective when used in conjunction with

Direct Mail

There are 530 UK TV stations, 821 UK radio stations and 234m

worldwide websites…

But only one letterbox!

Sources: DMA Client Report, MediaUK, Netcraft


Product Innovation – Hybrid Mail

User creates

document and

submits

File arrives at

TNT post

We print, post

and report back

…to doormat

From

desktop…

Ease of

email

Impact of

letter


Product Innovation – Waiting in the wings?

• A regional next day service for

unsorted machineable mail already

operates in large parts of the UK

• National DSA equivalent needs co-

operation in granting Access to

Outward Mail Centres

First sort

Reply Paid Equivalent

• International extraction service

offered for Postcards

• New service requires extraction and

daily collection from IMC’s


Agenda



VAT

Innovation



End to End delivery competition exists in

multiple EU countries

Population

No. Households

Market Share USP*

*In volume terms

Largest competitor

Germany

Deutsche Post

Netherlands

Post NL

Spain

Correos

Sweden

Posten Norden

82.1m 16.5m 45.9m 9.3m

40.2m 7.3m 14.2m 4.7m

90% 86% 88% 86%

TNT Post

4%

Sandd

10%

Unipost

10.3%

Bring Citymail

11.7%

6% 4% 1.7% 2.3%Other competitors


WIK Report confirms competition benefits all

stakeholders in the postal industry

The report analyses experience in postal markets where

there is end-to-end competition today (Germany,

Netherlands, Spain, Sweden)

Since liberalisation competitors have built up

market shares of 10 -17%

A sustainable universal service has been maintained with

improved quality

The incumbents have benefited with more flexible cost

structures, increasing their commercial success and

allowing them to respond effectively to changing market

conditions

The customer and consumer has benefited through

choice, new services and price competition

End to end competition is key to success for a sustainable

USO and will benefit everyone, but still need to resolve

VAT issue

Germany

Netherlands

Spain

Sweden


TNT Post Future Opportunities

DSA Delivery

Alternative final mile delivery would deliver and

drive real innovation and efficiency for the Postal

Industry in the UK

Royal Mail still has 99%+ market share in delivery

TNT Post UK is Royal Mail’s single biggest

competitor, but also their single biggest customer

TNT Post Revenue:

DSA Upstream10%

90%


E2E Pilots – What have we done?

Successfully piloted unsorted in Liverpool since ‘07

40,000 homes and three days a week delivery

Proved we could recruit, train and retain staff

Proved we could sort the mail to round

Validated mngt structure and delivery depot structure

Validated delivery timings and costs

Time to extend to a larger pilot


E2E Pilots – What are we doing?

Starting a new pilot in West London mid April

200,000 homes covering different property types

Encompass both unsorted and presorted mail

Developed and testing round creation automation

Sequencing mail to addresses in delivery routes

Delivering six days a week, three times to each home

95% delivered by day 3 as target SLA


VAT

Retail will charge it from 2nd April

TNT Post and all other competitors already charge it

Wholesale standard access currently VAT exempt.

One remaining hurdle to go

STOP

Excludes c40% of bulk mail volume for alternative

operators

How can DSA competitors help you?Graham Cooper, managing director, ONEPOST

#dmapost

Graham Cooper – Managing Director

DMA CONFERENCE

Thursday 29th March

• Formed in 2005

• Privately owned independent company

• 300m + mail items per year

• 360 regular customers

• 52 employees

• £60m per annum turnover

ONEPOST

• Most appropriate solution based on:-

• Weight

• Format

• Fall to earth

• Location of production site

• Full managed service covering letters, large letters,

packets, parcels, international and unsorted

ONEPOST

Four aspects for consideration

•VAT

•Product choice

•Discounts

•Data audit

VAT

• Can you reclaim your VAT ?

• If the answer is ‘No’ then there are a number of possible

solutions

VAT

Possible Solutions

• Agency account with Royal Mail Wholesale

• Single source solution

• Split the postage and logistics costs

Product choice

• Can I convert my mail to OCR or CBC to minimise

costs?

• If my mail doesn’t conform to CBC/OCR is 1400 or High

Sort a better option?

• Have I considered the differences between similar Retail

and Wholesale products?

Discounts

• Am I maximising my available discounts?

• Advertising Mail

• Responsible Mail (Entry and Intermediate)

Data audit

• Does an audit of the data give us further opportunities?

• What else could be achieved?

Data audit

• Operator v Operator

• Operator v Direct Delivery

• Wholesale v Retail

• National v Zonal

In summary

• If you are unable to recover VAT, take advice as to the best way to

negate the 20% VAT on at least the postage

• Take every possible step to move to Advertising Mail plus

Responsible Mail Intermediate and discount Wholesale postage by

4.2p per item (letters)

• Examine the opportunities to move to OCR / CBC mail and save up

to 3p / 2.6p respectively (letters)

• Have your data audited to see if there are other opportunities for

savings

Panel discussionPlease put your questions to our speakers!

#dmapost

Closing commentsMike Lordan, chief of operations, DMA

#dmapost

Thank you for attending

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