Consumers could lose out from the charge

The cost of a first-class stamp could rise by up to 5p, if European proposals get the go ahead.

The European Commission is proposing to apply Value Added Tax (VAT) on all supplies of postal services.

Under current rules, the Royal Mail, as a traditional national supplier, is exempt from VAT.

European countries will have the option of applying a reduced rate on packages up to 2kg in weight, but if the full 17.5% VAT rate were passed on to a first-class stamp it would mean a rise of 4.9p.

Price rises

Stamp prices increase by 1p to 28p for first class postage and 20p for second class post from Thursday.

It will be the first rise in three years for first class post, while second class stamps have cost 19p since 1993.

The European Commission's proposed tax is aimed at improving competition in the market.

It would not benefit any customers Royal Mail

While traditional national suppliers like the Royal Mail are exempt from VAT, their commercial competitors must charge the tax.

Royal Mail said adding VAT to stamps would be bad news for consumers.

"The last thing we would want any of our customers to face is a 17.5% increase in their postage due to VAT.

"It would not benefit any customers, and while many customers could recover VAT, a great many would not be able to," the Royal Mail said.

"The hardest hit would be small business, charities (many of whom rely on mail for fund-raising), and individual consumers."

Costs recoverable

The main advantage of the new system is the Royal Mail could claim back VAT from goods and services it uses.

The commission therefore says it is "unlikely to have a significant impact on the cost of postal services for private consumers".

But some accountants fear the savings from recoverable VAT would only go so far.

"I still think it will mean an overall increase in the cost of stamps", said Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA).

"I do not think it is good news for the consumer. Even if the reduced rate of VAT was charged at 5%, the increase would be twice the rate of inflation."