The Royal Mail should pay sales tax on individually negotiated service contracts, an adviser to a European Union court said today, prompting cheers from a rival operator.

Dutch postal company TNT brought a case against Britain, saying it was forced to pay value-added tax (VAT) on its UK services while those of Royal Mail were exempt from sales tax.

In Britain, TNT collects mail from clients, sorts it and hands it to Royal Mail, which delivers it.

The court adviser said a universal or general public postal service should remain exempt from VAT, whoever provides it.

"As the provider of a universal service which is defined and controlled in the public interest, the Royal Mail is liable to pay value added tax only where it is providing services under individually negotiated conditions," Juliane Kokott, an advocate general for the European Court of Justice said in a statement.

Any provider of a universal postal service can be regarded as a public postal service, Kokott said.

Most of TNT's customers are financial services companies that cannot recover VAT, and TNT had argued that Royal Mail should not be exempt from sales tax.

"We are delighted by this opinion and we hope the judge will support it in their final ruling," TNT UK Chief Executive Nick Wells said in a statement.

"We have always said that VAT law in the UK was unfair and anti-competitive. We will continue to fight for a level playing and elimination of VAT competition barriers," Wells said.

TNT said it was not a universal service provider but that it did compete with Royal Mail for large users such as financial institutions where contracts are individually negotiated.

Under EU law an exemption is allowed for "public postal services" but the British market is liberalised with private companies like TNT competing with Royal Mail.

"Nevertheless, the Advocate General takes the view that not all services provided by the Royal Mail are, of necessity, exempted from value added tax. Rather, the exemption applies only to those services which are provided in the public interest," the court statement said.

"The exemption cannot, in any event, apply where items are carried at individually negotiated prices," the statement said.

The court is not obliged to follow an adviser's opinion but does so in many cases.