1. Stamp Duty: The cost of postal
pricing changes
Thursday 29 March 2012
#dmapost

2. Introduction
Mike Lordan, chief of operations, DMA
#dmapost

3. What is changing and what does this
mean?
Alex Walsh, DMA
#dmapost

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. 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. What is changing?
Price control
•Postcomm formula
– Too complex
– Ineffective
•OFCOM decision
– No price control
– Except for 2nd class letters, some
packets

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. 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 services
Royal Mail “retail” eg products 3 months notice of price changes None
bought directly from Royal Mail
including all bulk mail products 3 months notice of changes to None
terms and conditions
Regulatory approval of “non No requirement
beneficial” changes

9. 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

10. 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?

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

13. Making sense of the changes…

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. A rejuvenated and simplified portfolio where
customers can choose which mail product by -
The Goal
1 2 3
Application Attribute Price

16. Application
Advertising &
Publishing Business
Sustainable

17. Format
Speed
Attributes
Volume
Attributes
Sortation
Machineability
Containerisation

18. Speed
Aim to deliver 90% of sorted 2nd Class by Day
C and 88% of Economy by Day E

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. • Replace 3rd Class descriptor
with Economy (no indicia
Simplifying
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. 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. • Simpler to understand, better
Summary
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

24. VAT- What’s changing and what can
you do to mitigate it?
Paul Osborne, partner, Zero VAT LLP
Stephen Taylor, partner, Zero VAT LLP
#dmapost

25. VAT Mitigation and Compliance
for the marketing and communications industry

26. 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 : legaladvice@dma.org.uk

27. VAT Mitigation on postage
Historically, postal users have been able to avoid paying VAT on
Royal 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 Exemption
VAT 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%.

28. 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.

29. 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)

30. 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

31. Refreshment break
Please join us for tea and coffee
#dmapost

32. 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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33. Stamp Duty- The cost of Postal pricing changes
Charles Neilson, Group Services Director
TNT Post UK

34. Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence

35. How the Downstream Access
Market Works
In commercial confidence

36. 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 discounts
In commercial confidence

37. Our customers
In commercial confidence

38. It’s not only the large posters…
A typical day
650
600
550
500
450
Customers
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 items
In commercial confidence

39. 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 2012
In commercial confidence

40. Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence

41. 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
In commercial confidence

42. 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

43. 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 costs
In commercial confidence

44. 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

45. Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence

46. 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
In commercial confidence

47. 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
In commercial confidence

48. 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

49. RM VAT – what the rules should say
1. Is the service
No
in the USO? 20% VAT
Yes
Exempt
In commercial confidence

50. Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence

51. Product Innovation
greenPost
greenPost
Buzz
monitoring
In commercial confidence

52. 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
In commercial confidence

53. 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 letter
In commercial confidence

54. 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’s
In commercial confidence

55. Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence

56. End to End delivery competition exists in
multiple EU countries
Germany Netherlands Spain Sweden
Deutsche Post Post NL Correos Posten Norden
Population 82.1m 16.5m 45.9m 9.3m
No. Households 40.2m 7.3m 14.2m 4.7m
Market Share USP* 90% 86% 88% 86%
TNT Post Sandd Unipost Bring Citymail
Largest competitor 4% 10% 10.3% 11.7%
Other competitors 6% 4% 1.7% 2.3%
*In volume terms
In commercial confidence

57. 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 issue
In commercial confidence

58. 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 delivery
90%
DSA Delivery
Alternative final mile delivery would deliver and
drive real innovation and efficiency for the Postal
Industry in the UK
In commercial confidence

59. 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
In commercial confidence

60. 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
In commercial confidence

61. 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
operators
In commercial confidence

62. How can DSA competitors help you?
Graham Cooper, managing director, ONEPOST
#dmapost

63. DMA CONFERENCE
Thursday 29th March
Graham Cooper – Managing Director

64. ONEPOST
• Formed in 2005
• Privately owned independent company
• 300m + mail items per year
• 360 regular customers
• 52 employees
• £60m per annum turnover

65. 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

67. Four aspects for consideration
•VAT
•Product choice
•Discounts
•Data audit

68. VAT
• Can you reclaim your VAT ?
• If the answer is ‘No’ then there are a number of possible
solutions

69. VAT
Possible Solutions
• Agency account with Royal Mail Wholesale
• Single source solution
• Split the postage and logistics costs

71. 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?

73. Discounts
• Am I maximising my available discounts?
• Advertising Mail
• Responsible Mail (Entry and Intermediate)

75. Data audit
• Does an audit of the data give us further opportunities?
• What else could be achieved?

76. Data audit
• Operator v Operator
• Operator v Direct Delivery
• Wholesale v Retail
• National v Zonal

77. 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

80. Panel discussion
Please put your questions to our speakers!
#dmapost

81. Closing comments
Mike Lordan, chief of operations, DMA
#dmapost

82. Thank you for attending
We look forward to seeing you at future DMA events!
Please visit www.dma.org.uk/event-listing for more information on
upcoming events