Legal fight threatens Royal Mail

Legal fight threatens Royal Mail

“From a personal point of view, the privatisation is positive news for the industry and access to external capital is good news for Royal Mail.

“But having a privatised Royal Mail with a 20pc VAT advantage is simply not fair. We expect a favourable decision to come out of this process and expect that to be towards the end of 2015 and early 2016.”

Changing Royal Mail’s tax status would create significant new costs for the business, eating into profits and possibly affecting dividend policy. The fact that there is a live legal process involving the business is almost certain to be listed as a risk factor when the Royal Mail publishes its IPO prospectus in the next few weeks.

The Government hopes to get the sale away in October, before a parallel threat of strike action by the Communication Workers Union is enacted.

“Clearly the Government would not want to address the VAT issue before privatisation because obviously the Government is interested in getting this business away and creating a £3bn valuation and getting it off the government books,” Mr Wells said.

“I think they are singularly focused on the privatisation and they have not been receptive to the wider issues of competition and creating a level playing field and VAT is a key part of that.”

Mr Wells said he thought it was inevitable the judicial challenge would be in the Royal Mail’s float prospectus when it is released, saying: “It’s obviously a fairly big issue.”

Royal Mail hit back this weekend, saying that the ownership structure had no impact on its exemption.

Officials said that TNT Post UK took a case against HMRC in 2009 on the issue and lost and that since then the European Court judgment has been transposed into UK law. The planned High Court action is a judicial review to challenge that move.

“Royal Mail does not accept TNT’s calls for the removal of the exemption,” a spokesman said.

“We believe it is clear that the regulatory obligations placed on Royal Mail regarding its provision of access services meet the necessary European and UK legal requirements for exemption.

“Furthermore, the removal of the exemption would increase the postal costs of charities and other businesses which are unable to recover VAT. This would not only be to the detriment of those organisations, but would also potentially drive business away from the postal market in general.”

Speaking to The Sunday Telegraph, Michael Fallon, the business minister, reassured private delivery firms they would not be adversely affected by Royal Mail’s privatisation.

Last week, Mr Wells said that it was dangerous to privatise a monopoly.

“How can it be a monopoly when TNT are out there?” Mr Fallon said. “There are other competitor businesses, there are other parcel businesses. It is a competitive market.”

Mr Fallon, who has been charged with pushing the privatisation through, said that the regulator, Ofcom, had strong powers to look at any competition issues. “It is for the regulator to regulate competition in this sector,” he said.

“Ofcom has all the powers it needs to ensure that competition is fair and that the Royal Mail’s special position as universal provider does not lead to any form of abuse. That is for Ofcom to police.”

Mr Fallon said strike action would not derail the process and that Royal Mail staff had received a good deal on pay.

They will also receive free shares in the businesses as part of the IPO.

“Strike action is not necessary – there is an 8.6pc pay offer out there for three years,” he said. “The rest of the public sector is getting 1pc a year – teachers and nurses.

“In addition, [staff] are getting free shares and Royal Mail have made it absolutely clear there will be no change in terms and conditions.”

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