THE European Commission began moves towards possible legal action against Britain yesterday, accusing it of giving Royal Mail unfair tax advantages over its rivals.

Brussels is challenging a UK decision to exempt most of Royal Mail’s activities from VAT, although the tax has to be paid by companies offering the same services. Similar legal action is being brought against Germany.

Announcing the move, Laszlo Kovacs, the Taxation Commissioner, insisted that any VAT exemption for postal services had to be properly applied to “minimise distortions of competition in a liberalised market between former monopolies and market entrants”.

Under European legislation, former postal monopolies have not had to pay VAT if they provided general services of public interest, such as the delivery of letters for the same price anywhere in their country. In Britain, Royal Mail is regarded as a universal service provider and as being entitled to exemption from VAT.

A spokesman for the British Government said: “We are satisfied that our application of the VAT exemption is consistent with EU requirements and with our commitment to competition.” He said that, since January, Britain has had the most liberalised postal market in Europe and had achieved this well before the EU-agreed timetable.

Royal Mail was equally surprised by the Commission’s decision to take the first steps in a legal action that could lead to a case before the European Court of Justice in Luxembourg.

A spokesman for Royal Mail said: “VAT is a matter for the Government. The last thing we would want to see is VAT imposed on postage stamps as that would adversely impact on individuals, small businesses that are not registered for VAT and charities.”

However, the Commission has no intention of pressing for VAT on stamps — as can be seen from its decision to open a parallel legal case against Sweden on the basis that the country insists that all operators, including the universal postal service Posten, levies VAT.

Seeking to justify the action against Stockholm, the Commission insisted yesterday that the country had failed to apply an exemption that existed in European legislation “and must be applied in a harmonised manner across the Community”.

Any move to introduce VAT in Britain would be more likely to affect services such as bulk mail orders, express deliveries and business couriers. Only customers already paying VAT would be able to reclaim the tax.

Britain, Germany and Sweden have two months to reply to Brussels’ criticism. If they fail to convince the Commission’s lawyers, they will have to argue their case before European judges in Luxembourg.

The Commission said yesterday that it is treating the trio as test cases since it is aware that they “are not the only ones where similar problems exist”.

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