§ The Earl of Mar and Kellieasked Her Majesty's Government:
Whether, in the light of Royal Mail's decision to withdraw from rail transport because it cannot reclaim the VAT, they will allow Royal Mail to reclaim the VAT on rail transport. [HL3657]
§ The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)It is a fundamental principle of the VAT system that tax incurred on purchases can only be reclaimed when it relates to taxable business activities. Businesses making VAT-exempt supplies, such as Royal Mail, cannot therefore reclaim the VAT they incur when purchasing the goods and services they need in order to make those supplies.
As the Minister for Science and Innovation made clear on 8 July (Official Report, col. 128), even if the VAT position were changed, there would nevertheless still be a very substantial saving for Royal Mail from their decision to withdraw from rail transport. The VAT cost will therefore have been only one of many factors likely to have been taken into account in coming to that decision. However, while the loss of business for rail freight is always regrettable, the Government remain committed to allowing Royal Mail the freedom it needs to take operational decisions in its best commercial interests.