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Stamp Duty: The cost of postal
pricing changes Thursday 29 March 2012
#dmapost
Introduction
Mike Lordan, chief of operations, DMA
#dmapost
What is changing and what does this
mean? Alex Walsh, DMA
#dmapost
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
#dmapost
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
#dmapost
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
#dmapost
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
In commercial confidence
How the Downstream Access
Market Works
In commercial confidence
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
In commercial confidence
Our customers
In commercial confidence
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
In commercial confidence
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
In commercial confidence
Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence
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
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
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
In commercial confidence
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
Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence
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
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
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
In commercial confidence
RM VAT – what the rules should say
1. Is the service
in the USO? 20% VAT
No
Yes
Exempt
In commercial confidence
Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence
Product Innovation
greengreengreengreenPostPostPostPost
Buzzmonitoring
In commercial confidence
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
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
Impact of
letter
In commercial confidence
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
In commercial confidence
Agenda
Downstream Access A rapid overview
OFCOM What are the material changes
VAT
Innovation
End to End delivery Aspirations
In commercial confidence
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
In commercial confidence
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
In commercial confidence
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%
In commercial confidence
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
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
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
We look forward to seeing you at future DMA events!
Please visit www.dma.org.uk/event-listing for more information on
upcoming events