Stamp Duty: The cost of postal pricing changes


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Stamp Duty: The cost of postal pricing changes

  1. 1. Stamp Duty: The cost of postalpricing changesThursday 29 March 2012#dmapost
  2. 2. IntroductionMike Lordan, chief of operations, DMA #dmapost
  3. 3. What is changing and what does thismean?Alex Walsh, DMA #dmapost
  4. 4. 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
  5. 5. 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
  6. 6. What is changing?Price control•Postcomm formula – Too complex – Ineffective•OFCOM decision – No price control – Except for 2nd class letters, some packets
  7. 7. 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
  8. 8. What is changing?Terms and conditions From 2nd April Universal service products eg 3 months notice of price 1 month’s notice of price stamped and metered mail changes changes 3 months notice of changes to 1 month’s notice of price terms and conditions changes Regulatory approval of “non “Fair and reasonable” terms and beneficial” changes conditions for universal servicesRoyal Mail “retail” eg products 3 months notice of price changes Nonebought directly from Royal Mailincluding all bulk mail products 3 months notice of changes to None terms and conditions Regulatory approval of “non No requirement beneficial” changes
  9. 9. What is changing?Terms and conditions - implications•Pricing changes could be more frequent•Product specifications changed at shortnotice – “beneficial and non-beneficial”•No formal appeals process
  10. 10. What is changing?Return to sender•Currently in product specs but norequirement•Chargeable option in future?Quality of Service•No obligation to do this for servicesoutside Universal service•Will RM continue?•Will they make public?•Research and private monitoring?
  11. 11. Summary• Postal Market very different after April – Scale and pace of change• More complex but opportunities for postal users• Help and advice available
  12. 12. What can Royal Mail do for you?Mike Gibson, head of account management, Royal Mail #dmapost
  13. 13. Making sense of the changes…
  14. 14. Why change? • Twenty-five years of bulk mail product evolution • Old-fashioned and complex product naming • Substantial change across our operational estate • Keeping mail relevant
  15. 15. A rejuvenated and simplified portfolio where customers can choose which mail product by -The Goal 1 2 3 Application Attribute Price
  16. 16. Application Advertising & Publishing Business Sustainable
  17. 17. Format SpeedAttributes Volume Attributes Sortation Machineability Containerisation
  18. 18. Speed Aim to deliver 90% of sorted 2nd Class by Day C and 88% of Economy by Day E
  19. 19. Simplifying 88 Low Sort 1525 High Sort • 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 Files
  20. 20. • Replace 3rd Class descriptor with Economy (no indiciaSimplifying 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
  21. 21. What’s going -Product Changes • 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
  22. 22. • Simpler to understand, betterSummary 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
  23. 23. VAT- What’s changing and what canyou do to mitigate it?Paul Osborne, partner, Zero VAT LLPStephen Taylor, partner, Zero VAT LLP #dmapost
  24. 24. VAT Mitigation and Compliancefor the marketing and communications industry
  25. 25. 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 :
  26. 26. VAT Mitigation on postageHistorically, 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 agencyagreement• Suppliers treating postal costs as a disbursementRoyal Mail VAT ExemptionVAT exemption refers to supplies of commercial services which arenot liable to VAT. This is different from zero rated supplies whichare liable to VAT, albeit at a rate of 0%.
  27. 27. VAT Mitigation on postage: Future• Most Royal Mail retail products will be liable to VAT• Access agreements may continue for as long as applicableRoyal Mail wholesale products are VAT Exempt• Disbursements for Royal Mail will no longer be relevantSingle SourcingSome businesses have raised the question of whether “singlesourcing” is a way for organisations to avoid VAT on postage.The solution proposed being to treat postage as part of thesingle supply of printed matter e.g. a direct mail pack. The logicbeing that if the mail pack is zero rated, the postage follows theliability of the pack because the postage is an “ancillary” cost.
  28. 28. What is the evidence against treating postage as an ancillarycost?Legal analysisCard Protection Plan Ltd – determining single or multiple suppliesAre postage costs “ancillary”?HMRC Published materials – VAT Notice 700/24You are providing a service when:• Delivering someone else’s goods• Posting your client’s mail (e.g. publicity or advertising material)
  29. 29. 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 supplierWhat 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
  30. 30. Refreshment breakPlease join us for tea and coffee #dmapost
  31. 31. How can DSA competitors help you?Charles Neilson, group services director, TNT PostAngus Russell, director of legal and corporate affairs, TNT Post #dmapost
  32. 32. Stamp Duty- The cost of Postal pricing changesCharles Neilson, Group Services DirectorTNT Post UK
  33. 33. Agenda Downstream Access A rapid overview OFCOM What are the material changes VAT Innovation End to End delivery AspirationsIn commercial confidence
  34. 34. How the Downstream Access Market WorksIn commercial confidence
  35. 35. Mail Solutions Premier PremierSort A 2 day service for pre sorted mail. A 2 or 3 day service for unsorted mail machineable mail. • Savings of 10% • From 250 items a collection • Later more convenient pick up times • Competitive pricing through access to bulk mail discountsIn commercial confidence
  36. 36. Our customersIn commercial confidence
  37. 37. It’s not only the large posters… A typical day 650 600 550 500 450Customers 400 Premiersort 350 Allsort 300 Premier 250 200 150 100 50 0 0 - 1000 1001 - 5000 5001 - 10,000 10,001 - 200,000 200,001 - 2,000,000 No of itemsIn commercial confidence
  38. 38. Market declining , DSA Maturing Total UK addre s s e d m ark e t 25 = DSA Overall Market + = Total mail market 20 Difficult to get exact data! Ofcom use 16bn olum (bn) 15 DSA at 7.3bn e 10 V DSA at 46% 5 0 0 06 07 08 0 09 10 11 12 1 13 14 8/ 2/ /0 / /0 /1 /1 / /1 /1 / /1 0 09 1 13 7 8 8 0 1 2 2 4 5 Ye ar % Market Share - Quarterly Source: Royal Mail, PostComm 65.0% 60.0% DSA Market 55.0% 50.0% TNT Post shows good market % TNT share growth and is at 50.7% 45.0% % Non TNT 40.0% YoY absolute growth slowing 35.0% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012In commercial confidence
  39. 39. Agenda Downstream Access A rapid overview OFCOM What are the material changes VAT Innovation End to End delivery AspirationsIn commercial confidence
  40. 40. 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 removedIn commercial confidence
  41. 41. 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)In commercial confidence
  42. 42. Margin squeeze regulation change - illustration Retail minus Wholesale plus Wholesale plus 2006-11 2011/12 2012+ FAC Minimum Minimum Minimum overall = Ave discount 3p headroom <2.5p? headroom 4.1p imposed by (based on Royal LRIC per (based on regulator estimated Royal Mail upstream fully contract (based on Mail upstream allocated costs) = 1.25p? commercially costs) agreed Wholesale price of differential) Wholesale price of 18 pence + X – 16 pence – based based on cost on estimated cost Wholesale price of 14 pence – set by regulation not costsIn commercial confidence
  43. 43. 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?In commercial confidence
  44. 44. Agenda Downstream Access A rapid overview OFCOM What are the material changes VAT Innovation End to End delivery AspirationsIn commercial confidence
  45. 45. 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 disbursementIn commercial confidence
  46. 46. 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 accessIn commercial confidence
  47. 47. RM VAT – what the rules will say 1. Provided under a USO No or Access condition? 20% VAT Yes 2A. Must be No No offered 2. Is it price controlled? to persons generally Yes at the same price? No Yes Exempt Yes No 3A. Must be offered Yes to persons 3. Non-price terms generally on the freely negotiated? same terms?In commercial confidence
  48. 48. RM VAT – what the rules should say 1. Is the service No in the USO? 20% VAT Yes ExemptIn commercial confidence
  49. 49. Agenda Downstream Access A rapid overview OFCOM What are the material changes VAT Innovation End to End delivery AspirationsIn commercial confidence
  50. 50. Product Innovation greenPost greenPost Buzz monitoringIn commercial confidence
  51. 51. 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, NetcraftIn commercial confidence
  52. 52. Product Innovation – Hybrid Mail User creates File arrives at We print, post document and TNT post and report back submits From desktop… Ease of Impact of email …to doormat letterIn commercial confidence
  53. 53. Product Innovation – Waiting in the wings? First sort • A regional next day service for Reply Paid Equivalent unsorted machineable mail already operates in large parts of the UK • International extraction service offered for Postcards • National DSA equivalent needs co- operation in granting Access to • New service requires extraction and Outward Mail Centres daily collection from IMC’sIn commercial confidence
  54. 54. Agenda Downstream Access A rapid overview OFCOM What are the material changes VAT Innovation End to End delivery AspirationsIn commercial confidence
  55. 55. End to End delivery competition exists in multiple EU countries Germany Netherlands Spain Sweden Deutsche Post Post NL Correos Posten NordenPopulation 82.1m 16.5m 45.9m 9.3mNo. Households 40.2m 7.3m 14.2m 4.7mMarket Share USP* 90% 86% 88% 86% TNT Post Sandd Unipost Bring CitymailLargest competitor 4% 10% 10.3% 11.7%Other competitors 6% 4% 1.7% 2.3% *In volume termsIn commercial confidence
  56. 56. 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) Germany Since liberalisation competitors have built up market shares of 10 -17% A sustainable universal service has been maintained with improved quality Netherlands The incumbents have benefited with more flexible cost structures, increasing their commercial success and allowing them to respond effectively to changing market conditions Spain 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 Sweden VAT issueIn commercial confidence
  57. 57. TNT Post Future Opportunities TNT Post Revenue:10% DSA Upstream TNT Post UK is Royal Mail’s single biggest competitor, but also their single biggest customer Royal Mail still has 99%+ market share in delivery90% DSA Delivery Alternative final mile delivery would deliver and drive real innovation and efficiency for the Postal Industry in the UKIn commercial confidence
  58. 58. 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 pilotIn commercial confidence
  59. 59. 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 SLAIn commercial confidence
  60. 60. One remaining hurdle to go VAT Retail will charge it from 2nd April TNT Post and all other competitors already charge it Wholesale standard access currently VAT exempt. STOP Excludes c40% of bulk mail volume for alternative operatorsIn commercial confidence
  61. 61. How can DSA competitors help you?Graham Cooper, managing director, ONEPOST #dmapost
  62. 62. DMA CONFERENCE Thursday 29th MarchGraham Cooper – Managing Director
  63. 63. ONEPOST• Formed in 2005• Privately owned independent company• 300m + mail items per year• 360 regular customers• 52 employees• £60m per annum turnover
  64. 64. 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
  65. 65. Four aspects for consideration•VAT•Product choice•Discounts•Data audit
  66. 66. VAT• Can you reclaim your VAT ?• If the answer is ‘No’ then there are a number of possible solutions
  67. 67. VATPossible Solutions• Agency account with Royal Mail Wholesale• Single source solution• Split the postage and logistics costs
  68. 68. 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?
  69. 69. Discounts• Am I maximising my available discounts? • Advertising Mail • Responsible Mail (Entry and Intermediate)
  70. 70. Data audit• Does an audit of the data give us further opportunities?• What else could be achieved?
  71. 71. Data audit• Operator v Operator• Operator v Direct Delivery• Wholesale v Retail• National v Zonal
  72. 72. 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
  73. 73. Panel discussionPlease put your questions to our speakers! #dmapost
  74. 74. Closing commentsMike Lordan, chief of operations, DMA #dmapost
  75. 75. Thank you for attendingWe look forward to seeing you at future DMA events!Please visit for more information onupcoming events