The European Commission has confronted Germany, Sweden and the United Kingdom over the way in which they are applying the postal exemption on VAT. 

The liberalised postal market consists of both former monopolies (eg Royal Mail in the UK) and new entrants and it is for the Commission to ensure a level playing field exists between these two sets of 'players'.  To this end, the VAT postal exemption is designed to compensate former incumbents for their costs in relation to their universal postal services obligation, as this is an outlay which its competitors do not incur. 

In Germany and the UK this provision is interpreted as permitting an exemption from VAT on all or most postal services supplied by their respective former monopolies.  This is being criticised by the European Commission which argues that the exemption should apply only in relation to the discharge of the universal service obligation, as a wider application distorts competition by prejudicing the competitors of the former incumbents. 

Sweden, on the other hand, is in trouble for not exempting postal services at all.  This is viewed by the Commission as prejudicing the former Swedish monopoly. 

The member states now have two months to reply.  It is worth noting that the Commission has made a proposal to modernise the current VAT rules on postal services.

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