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VAT free UK shortcodes for charities?

Have a read of this one…

Link: Calls for Tax Exemption for Charity Sms Donations

Vir2, a provider of SMS marketing and fundraising solutions for charities, has welcomed the decision by UK politican, Mark Oaten MP to file an Early Day Motion calling upon the Government to stop charging VAT (sales tax) on UK charity donations made by SMS. All other methods of giving to charity are VAT exempt. Premium SMS texts are a particularly useful way of collecting money quickly, but the Government are not treating it the same as other methods.

On the face of it, this sounds like a brilliant idea. I support it.

Vir2 favours a solution of creating “VAT free” short codes that can only be used by registered charities for the purpose of fundraising. The awarding of short codes is already regulated by Ofcom and Phone Pay Plus.

The problem? Well, you’ve got four (or five, depending on your viewpoint) huge, huge multinational companies who are earning massive percentages of their revenue from text messaging. Premium text messaging, in particular, contributes a tidy sum.

The last thing your common-or-garden mobile operator needs is the bright light of a consumer movement demanding tax exemption on donations made by text. Whilst one would have thought the key issue resides with Inland Revenue, I reckon that’s just a sideshow. At 17.5%, it’s a bit part in the huge game of premium text.

The tax is nothing, NOTHING when it comes to looking at the revenue share from premium rate text messaging. Operators are routinely taking 40-50% of premium text revenues citing all sorts of bollocks about ‘keeping the lights on’ and having to manage the billing relationship with the end-user.

The net effect is that when you donate to a charity, let’s say, via a £1.50 text message, a good whack — 30-60 pence of that (depending on exact relationships) goes direct to the operator. This is something that winds up the charity no-end, the aggregator and the service provider. I’ve no doubt that it’s also intensely annoying for the person donating the money when they read the small print (“At least 80p of your 1.50 goes to the charity… the rest goes to the thieving bastards…”)

There’s lots of conversations to be had on the topic. Pluses and minuses all round. I strongly favour operators taking a significantly reduced percentage of all premium rate text message traffic, not just charity donations.

But, as the chaps at Vir2 put forward above, I’d settle for charity shortcodes that are both VAT free — although I’d also like to see much higher payouts nearer the 90% mark, at least for charities.

Read more about Vir2 at www.vir2.co.uk.

By Ewan

Ewan is Founder and Editor of Mobile Industry Review. He writes about a wide variety of industry issues and is usually active on Twitter most days. You can read more about him or reach him with these details.

16 replies on “VAT free UK shortcodes for charities?”

I believe operators take significant cut of premium rate revenue, mainly to cover bad debt, add that to cost to serve and additional support that goes around premium services its surprising how it mounts up.

Why not write some more about the frequency of fraudulence with premium rate services? this is the real problem that keeps that percentage high!

Interesting how the charity bell is rung time again, messaging companies digging around to find the real margins so they could seek to improve their own profits.

well thats modern day business for ya 😀

‘citing all sorts of bollocks about ‘keeping the lights on’ and having to manage the billing relationship with the end-user. ‘

hmmm….so is there a market for a smart M(V)NO tp drop their shortcode % to attract those customers who give routinely?

I’m *sensing* that the argument about KTLO (Keeping The Lights On) doesn’t hold much sway at SMSTextNews Towers (or beach blanket – how’s the weather Ewan?). Yes, when you do a raw per-MB charge vs. current ‘unlimited’ data tariffs, SMS ‘data’ looks ridiculously expensive. But of course raw bits aren’t the whole equation. Noooo…..

Are you sitting comfortably? good.

Given there’s a (more or less at a point in time) fixed cost to run a network and a fixed minimum return investors expect, for a given customer base there is a commensurate fixed minimum amount that must be extracted each month in cash to stay in the black. If you are providing 3 basic products – voice, text and data – the overall KTLO cost needs to be split up in a way that doesn’t kill off a customer’s propensity to consume any of the three. Hopefully in a well-balanced setup, customers pay a fixed amount per month for an individually suitably-proportioned wedge of each flavour (think FlexT / Mix’n’Match etc). Each service has its own technical foibles (speed, clarity, QoS, global interoperability, latency, delivery guarantee, etc), without any of which would see that service fail to meet customer needs.

As an MNO pricing manager, you juggle the need to realise revenue to KTLO against the network’s ability to deliver and the customer’s desire to pay for services. MNO’s are constantly tweaking offerings, networks, handsets etc to do exactly this. Should you get the balance wrong, you end up giving away services/handsets without recovering that revenue from either other streams or from increased uptake of a cheaper product. And then you go broke.

If an MNO made SMS free (because SMSTextNews says the cost of delivering 160 charachters is now £0.00000000000001 :-)) they would still need to pay other networks to deliver SMS off-net. So unless EVERY MNO IN THE WORLD changed their models overnight, someone would loose out big time. Unless they could convince their customers to pony up extra for voice. Or an unsubsidised handset. Or both. And not-quite-flat-rate data. etc etc.

With over 700 GSM MNO’s around the world, I find it really hard to support the idea that there is a global SMS price fixing conspiracy. Every one of those MNO’s looks at their costs, their need to provide a return, what their customers want to do with their phones and *critically* what customers are prepaired to pay for each service.

MNO’s that get the balance wrong go broke. Those who hit the sweet spot (which varies wildly from nation to nation depending on earning power, regulations, cultural factors and technology adaption) succeed.

If MNO’s were gold mines their share prices would be up there with Rio Tinto. Competition ensures consumers and economies get huge benefits from Mobility (about 1-2% increase in GDP last time I looked – hence why developing nations are so keen on MNO’s). I’d be interested to hear from any ex-MNO CFO’s who think there’s a place for near-as-dammit free SMS because bits are cheap.

Cheers,

Mike

Ah good answer, Mike. I have a problem with the huge percentage that the operators take from premium text messages. I’m reluctantly sold on the cost of SMS to the consumer. Reluctantly. But, for example, taking 50p from a 150p transaction is steep, very steep. Don’t you think?

> hmmm….so is there a market for a smart M(V)NO tp drop their shortcode % to attract those customers who give routinely?

I don’t think so for this application.. If you could wrap this up as a ‘Charity’ MVNO then perhaps, but not by saying it’s a network that ‘pays more on premium rev share’.. Personally I don’t think a charity MVNO would gain enough traction – not least of all because of KTLO issues etc.

Ahem, J.Moverley – there is no bad debt issue. Operators only pay the Charities after a 90 day settlement cycle after they have deducted all amounts for bad debt/insufficient credit. Premium SMS is effectively a direct debit instruement with no guarantee on payment. The “cost to serve and additional support” is borne by the SMS Aggregator (not operator) and they charge pennies, not percentages.

Mike – no one is asking for free SMS but just some commercial honesty on premium SMS. The interchange termination cost is no different for a standard or premium SMS and thus the large pricing differential is for the service. This is oligopoly pricing as there is no competition to drive these prices down. Charities have no other option than mobile for small impulse donations and consumers are not going to change operators because one operator is marginally better on charges to charities than another – in fact 99% of consumers are not even aware of the usurious charges underpinning their SMS charitable donations. It should be regulated to a) cap cost and b) be more transparent to consumers.

There is competition between the operators on voice and text, there is none on premium SMS. It’s cartel pricing, plain and simple.

The age-old ‘big slice of small pie or small slice of big pie’?

That Huge Slice is actually made up of lots of smaller slices, covering a multitude of sins: roaming termination fees, itemised billing setup fees, financial settlement (outgoing) fees, a few more I can’t recall from the last time I discussed this with an MNO PSMS boffin and , er, naked profit.

Remember, the setup, running and reconciliation of all these PSMS offers takes real people real time. That might equate to maybe 1 FTE (2,000 man-hours) per campaign, across the whole organisation. That’s maybe £50k gross cost incl. NI/BUPA/whatever for an on-to-it mobile payment deal setup guru-type. So you’d need >100,000 donations on your network alone to just break even at the exhorbitant rate of 50p per PSMS.

Now I’m not one to condone rampant profiteering. If that’s what is going on then MNO’s are setting themselves up for a snazzier, easier, more trustworthy system to supplant them. Problem is, if one comes along they can always just drop the fees to squeeze them out. That’s capitalism for you. The consumer will decide. Would I change MNO because my current one was taking a few extra 10p pieces from the poor Doggersea Bat’s Home inmates? hmmm….not really.

All this said, 2008 will be very interesting, with what O2 are doing lifting the bar on m-payment possibiliites.

This reminds me of the bouncing a cheque fee, which bears no relation to the true cost.

Simply saying that its all to complicated becuse of so many companies etc is a bit of a cop out and just a way to hide what is over priced in the main stream and boardering on robbery when it comes to premium texts.

I dont think the raw mb charge works with this example because its not supposed to work that way but a more resonable arguement maybe the actual cost on a per text basis and go from there.

What exactly is the cost to send a text to the network?

Maybe the regulator needs to have a look at all of this and get some straight answers….

Regarding the comment about “Interesting how the charity bell is rung time again, messaging companies digging around to find the real margins so they could seek to improve their own profits.” Just to explain we provide marketing technology services to charities. Any increase in margin would be passed on to the charity. Vir2’s services are paid for by a charity whose purpose is to spread the adoption of technology in the charity sector. We would not benefit directly if premium messaging margins increased though clearly the more charities that used the service the better our client/paymaster would feel about us/our services.
I hope that makes our agenda clearer.

There is a deeper issue here for the industry, it is whether mobile networks are ever going to go anywhere with Pay4it and Premium SMS. Unless mobile payment systems evolve they will be a footnote in the history books.
The networks deserve a lot of credit for creating a micro-payment solution in a space where the banks dare not tread and they deserve to be rewarded, but a payment system that does not account for VAT properly is just a toy payment system.
There are strong arguments for mobile networks not evolving into banks, but I guess the question is how committed are the mobile networks to Premium SMS and Pay4It?
Charity donations are a big element of discretionary spontaneous spending and though charity spend is dominated by direct debit by value it is still predominantly cash by volume (lots of sub £10 payments). If premium SMS is to evolve then charity donations are a good way in to a significant cash substitution market.
So come on, where is the ambition?

> Ahem, J.Moverley – there is no bad debt issue. Operators only pay the Charities after a 90 day settlement cycle after they have deducted all amounts for bad debt/insufficient credit. Premium SMS is effectively a direct debit instruement with no guarantee on payment. The “cost to serve and additional support” is borne by the SMS Aggregator (not operator) and they charge pennies, not percentages.

In the mainstay networks in the UK payout on 100% of delivered messages these days. Rarely do they make any bad debt clawbacks..

Additionally in terms of the payment cycle, 3 of the 6 (PSMS) carriers pay roughly 30 days after the end of the month, and the others between 45 and 60.

> All this said, 2008 will be very interesting, with what O2 are doing lifting the bar on m-payment possibiliites

I’m not aware of any current bars that exist on O2, that are not on the other networks, and ultimately since the change in stance over e-money directive interpretation, off handset purchases are now fine on all nets.

We have successfully lobbied (most) of the networks in the UK to launch tariff points up to £10 where the revenue share is much higher than existing percentage outpays. The idea being to open up new markets, to include charity…

Naked profit we can handle but super profits we don’t like. “Remember, the setup, running and reconciliation of all these PSMS” costs Operators almost nothing as these charges are borne by the SMS Aggregator (who employs that FTE you talk about) and eventually the Charity. Operators basically charge 50%+ to collect donations against their subscribers airtime credit. They charge these rates because their isn’t “a snazzier, easier, more trustworthy system to supplant them” and they know this.

As I’ve mentioned here before, the role the MNO plays in the PSMS value chain is the same as a retailing shop – they provide the last point of distribution to the consumer. Ringtone providers advertise their own wares in the same way that Coca Cola advertises its own products. So a 22% cut isn’t so unreasonable in this light.

In any case, the charities that I’ve spoken to have said that PSMS is no more expensive than the other ways they have of raising money – the guys in the street who sign you up for a direct debit have an 18 month pay back period for example.

Despite the festive season I can’t really see the networks reducing their cut. Whatever the arguements about whether their light-burning share is appropriate there’s really very little incentive for them to reduce their share.

One can construct an argument for reduced costs for charity-only shortcodes but this doesn’t really happen elsewhere – those chuggers outside the shopping centre take a huge split and Terry Wogan even charged for his last Children in Need appearance (allegedly)

Donators have already demonstrated that they are happy to “text to give” at the existing price points, regardless of whether the price paid is VAT inclusive or not. So everyone wins from VAT free shortcodes except HMRC: The donator pays the same, (assuming the network, the aggregators, and any other parties keep their take constant) and so there’s more for the charity. It’s definately something that we support but I suspect in the end the networks billing systems might make it impossible to implement.

Why not make Premium Rate SMS dontations eligible for GiftAid as well – users would simply need to register a house number and postcode?

Reading these comments makes me wonder how many people understand how VAT works? We have called for a reduction in VAT not a reduction in network share. Reducing VAT has no impact on networks revenues.
The argument that it will increase pressure on network margins is absurd. As if people can’t work out 17.5% of the charge and see what the networks are charging at the moment.

Njar – o2 alone do not support voice/video short codes in the UK and this is a significant drag on product innovation. Some operators may not claw back bad debts on contract accounts but all operators block payment on where insufficient credit exists on prepaid accounts but never advise this in real time. This payout shock is notified with settlement, some 60 days later.

John – the retailer buys stock from Coca Cola, stacks their shelves and then sells the product to the passing trade. They source both product and sales. The mobile operator does neither and charges usurious pricing compared to the standard card payment options. If I donate using my Natwest card, they could say, “hey this is our payment card and we want 50% of the rake”. That would be madness and so they charge 2.5%.

> Njar – o2 alone do not support voice/video short codes in the UK and this is a significant drag on product innovation.

I thought you’d were infering to express direct billing innovations. I very much understand and appreciate the O2 voice and video code issue. (I head sales @ the uk’s largest provider of psms, voice and video codes!).

> Some operators may not claw back bad debts on contract accounts but all operators block payment on where insufficient credit exists on prepaid accounts but never advise this in real time. This payout shock is notified with settlement, some 60 days later.

hmmm.. I can only imagine you’re getting a raw deal here, or your experiences in this area have been far from ideal. This is trivial stuff.. When I mentioned ‘delivered messages’ above, I did this for a reason. Ultimately and as a rule of thumb we work on the basis that where you don’t have a ‘delivered’ delivery receipt, the user has not been billed. Delivery receipts ‘ought’ to be available as standard, and should be near instant. We see under 1% margin difference between carrier payout, and what we’re expecting (based on ‘Delivered’ receipts). Therefore at ANY given time you can rest fairly assured that you can predict how much revenue you’ll be expecting come 30 days after the end of the month in question. We can also actually now predict in real time why a user has not been billed..

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