Weekly VAT News

This edition of the Global Tax Policy and Controversy Watch provides updates from the OECD, G20, Argentina, Australia, Brazil, Canada, Denmark, France, Germany, Italy, Kenya, Luxembourg, Pakistan, Singapore, Turkiye, the United Kingdom and the United States.

Topics – telecommunication bundles, whether supplied when sold, adjustments for use and enjoyment, vouchers

Lycamobile UK Ltd

The First-tier Tribunal (FTT) has released its decision in this lengthy decision covering the VAT treatment of telecommunication plan bundles sold in the UK for VAT periods running from 07/12 to 08/19. The Plan Bundles consisted of the rights to future telecommunication services (telephone calls, text messages and data) in some cases with the right to access other types of services. There were hundreds of different Plan Bundles and the precise composition of those Plan Bundles varied.

In relation to the VAT treatment of the Plan Bundles, Lycamobile UK Ltd (Lycamobile) contended that the services contained within each Plan Bundle were supplied only as and when the services were used and only to the extent that its use involved a standard-rated supply for VAT purposes and accounted for VAT on that basis. HMRC considered that those services were supplied when the relevant Plan Bundle was sold such that the consideration received for each Plan Bundle would be taken into account for VAT purposes in full regardless of usage subject to a subsequent adjustment to the extent that the usage did not involve a standard-rated supply. HMRC assessed for VAT on that basis.

Lycamobile advanced four grounds of appeal:

1. the Plan Bundles were face-value vouchers that were retailer vouchers and not single-purpose vouchers;
2. the Plan Bundles should be treated as such in order to comply with general principles of European Union (EU) law which bound HMRC;
3. activating a Plan Bundle was not chargeable to VAT because, at that time, it was not possible to identify the nature and extent of the services which were to be supplied under the Plan Bundle with sufficient particularity; and
4. from the perspective of the consumer, there was functionally no difference between a Plan Bundle and the top-up credit which customers of Lycamobile were able to use to receive telecommunication services. HMRC accepted that such top-up credits were treated for VAT purposes as face-value vouchers and the general EU principles of fiscal neutrality and non-discrimination required that Plan Bundles were treated in the same way.

The aggregate amount of VAT in dispute is approximately £51 million. In relation to one of the three assessments, Lycamobile advanced a fifth ground of appeal - that it reserved the right to argue in due course that the assessments were not made to the best judgment HMRC. The parties agreed that the question of best judgment and quantum would be determined by the parties by mutual agreement or, if necessary, by the FTT at a subsequent date.

Lycamobile is part of an association of connected companies which together operate as the world's largest international mobile virtual network operator (an MVNO) and one of the largest MVNOs in the UK. Lycamobile is a supplier of telecommunication services in its own name using the infrastructure of a mobile network operator (an MNO) such as Vodafone, O2 or EE.

During the period in question, a customer of Lycamobile would acquire a SIM card either through Lycamobile’s network of partner retailers or through Lycamobile’s website or app. Usually, the SIM card was purchased with credits equal to the amount paid for it but occasionally there might be a promotion in which the customer received more credits on the SIM card than were paid for.

The credits could be used by the customer to acquire telecommunication services (such as making telephone calls, sending text messages or accessing data) and a range of other services, in each case at the then prevailing price for the relevant service at the time of use - "Pay As You Go" or "PAYG"; or to acquire Plan Bundles. A customer could also acquire Plan Bundles by way of purchase using a credit or debit card.

There were significant variations in the composition of Plan Bundles - further details are provided within the full decision but in summary:

• "Type 1 Bundles” were comprised solely of the right to use Allowances.
• "Type 2 Bundles" included the right to use one or more of the Allowances within the relevant Plan Bundle to access certain specified additional services (the "value added services" or "VAS") unless the customer chose to opt out. The VAS were as follows:

1. the right to make telephone calls to a specified number in order to obtain a recording of sports information and news (the "sports update VAS");
2. the right to make telephone calls when travelling in non-EU countries for no extra charge (the "non-EU Roaming Calls VAS"); and
3. the right to make an "international airtime transfer" of some or all of the customer's PAYG credits from his or her own account to another customer of the Appellant located in another country (the "IAT VAS")

• "Type 3 Bundles" - Roam Like Home bundles had Allowances in at least some of the Plan Bundles which could be used from the non-EU countries which were mentioned in that promotion.

Issue One

The FTT was required to consider what service Lycamobile supplied when it sold a plan bundle and when that service was supplied. The FTT summarised the effect of the relevant legislative provisions during the period to which this decision relates as follows:

1. VAT was chargeable on, inter alia, a supply of services;
2. a chargeable event for VAT purposes arose when the legal conditions necessary for VAT to become chargeable were fulfilled;
3. as regards the time of supply, the basic rule was that VAT became chargeable when the services in question were supplied subject to a payment made on account before the services were supplied, in which case VAT became chargeable on the receipt of the payment and on the amount received; and
4. as regards the place of supply, given that both the supplier (Lycamobile) and the customer belonged in the UK, the effect of the legislation was that supplies by Lycamobile to the customer were to be regarded as being made in the UK except that, during the period prior to 1 November 2017, supplies of telecommunication services which were effectively used and enjoyed in a country outside the EU were to be treated as being made in that country.

Type 1 Bundles

In relation to Type 1 Bundles, in light of the decisions in MRL and Find My Past (FMP), the FTT considered it needed to establish whether the sale of the Type 1 Bundles was the "real supply" for which the customers contracted i.e. whether it was a supply of services in and of itself or whether it was merely a preliminary step to the "real supply" with the use of the Allowances contained within the Plan Bundles at a later point.

The FTT held that Type 1 Bundles amounted to the "real supply". When the customer acquired a Type 1 Bundle, they received the Allowances and that was the customer's purpose in purchasing the relevant bundle. At that point, the customer received a supply of telecommunication services as the Allowances conferred on the customer the right to use that network for a specified amount of telephone calls, text messages and/or data. The supply of this right to use the Allowances was a supply of telecommunication services in and of itself and was not merely a right to a future supply of telecommunication services. As such, Section 7A(3) VATA did not apply as the creation of the right to future services is not, in and of itself, the supply of a service.

On each occasion when a Type 1 Bundle was acquired, the FTT considered there was a legal relationship of reciprocity between the customer purchasing the Type 1 Bundle and Lycamobile and a direct link between the consideration paid by the customer for the Type 1 Bundle and the right to telecommunication services in the form of the Allowances in the Type 1 Bundle. The supply was made at the point when the customer acquired the Allowances and the place of that supply was the UK, either because, prior to 1 January 2015, that was where Lycamobile belonged or on and after 1 January 2015, that was where the customer belonged. Accordingly, VAT became chargeable at the point when the relevant Type 1 Bundle was sold and was chargeable on the consideration paid for the relevant supply (Esporta, MEO, Vodafone).

The FTT did not see any parallel between the acquisition of the Allowances in the Type 1 Bundle and the acquisition of Points Rights in MRL or the acquisition of credits in Find My Past (FMP). In each of MRL and FMP, the intention of the customer in acquiring his Points Rights or credits was to use those Points Rights or credits at some future date to secure the service which was the customer's real purpose. In MRL, that purpose was the right to accommodation that could be secured by using the Points Rights and, in FMP, that purpose was the right for the customer to view and download documents which the customer had found using the free search facility. The Allowances in the Type 1 Bundles had an inherent value to the customer in and of themselves. The Allowances were not simply a "currency" to be used in securing future services the supply of which was the ultimate aim of the customer and the nature of which was unknown. The situation in this case was much closer to the facts in Marcandi, where the credits were the end, in and of themselves, and not part of a single indivisible economic supply leading to the sale of goods.

In conclusion, the FTT held that consideration payable for the Type 1 Bundles was chargeable to VAT at the point when the Type 1 Bundles were acquired, regardless of the extent to which the Allowances contained within the Type 1 Bundles were subsequently used.

The FTT also found that the Type 1 Bundles are very different from the PAYG credits that are used as consideration for Lycamobile’s other supplies considering that PAYG credits are effectively a "currency" to be used in acquiring services at some future point as in MRL and FMP. The FTT held that the question of fiscal neutrality (raised at the hearing) was misconceived as the purchase of PAYG credits to be applied at a later time in acquiring telecommunication services is nothing like the purchase of an immediate right to telecommunication services contained in a Plan Bundle.

Type 2 Bundles

The FTT held that the Type 2 Bundle for customers who could access subscription services was the same as the VAT analysis for Type 1 Bundles. However, the FTT considered that a Type 2 Bundle where a customer had the right to access one or more of the VAS did not follow the same analysis and started by recapping on the facts around the type 2 bundles with VAS. The FTT concluded that, from the viewpoint of the typical customer, the sale of each Type 2 Bundle should be treated for VAT purposes as a single composite supply of which the Allowances were the principal element and the VAS were ancillary to it because they were not an end in and of themselves but merely a means of better enjoying the Allowances.

In particular, the FTT noted the importance attached by the Court of Appeal in Gray & Farrar International LLP to the contractual terms in determining the nature of the relationship between the parties and held that it was significant that neither the general terms and conditions nor the "bundle specific" terms and conditions included any reference to the VAS whereas the latter referred to the Allowances. Further, access to the VAS was only by using the Allowances and thus the VAS were never separate from the supply of telecommunication services represented by the Allowances but were instead intimately and inextricably linked with that supply and ancillary to that supply. Finally, the fact that the VAS were advertised as enabling the customer to "get even more" from his or her Plan Bundle shows that they were intended to be a means of better enjoying the supply of telecommunication services which was the predominant feature of the package comprising the Type 2 Bundle and not an end in and of themselves.

For VAT purposes, the ancillary elements within a single composite supply share the same tax treatment as the principal element within that supply (CPP, Purple Parking, Město). Consequently, at least so far as the sports update VAS and the IAT VAS are concerned, the FTT held that it was it is unnecessary to consider whether, had either of those two VAS been separate supplies, they would have amounted to supplies which were not supplies of telecommunication services. The FTT held that the sports update VAS and the IAT VAS were not separate supplies in their own right but were merely ancillary elements in a single composite supply of telecommunication services.

However, the FTT found that non-EU Roaming Calls VAS raised a slightly different question in that that service is generically no different from the telecommunication service comprising the telephone call Allowances which were to be used within the UK. As such, even though the non-EU Roaming Calls VAS was an ancillary service, the FTT could not see how that fact can override the "effective use and enjoyment" place of supply rule which was in place prior to 1 November 2017 in relation to telecommunication services.

The FTT held that it is very different from disregarding an ancillary service which, had it been a service in its own right, would have fallen into a different charging category - for example, zero-rated or exempt - from the principal telecommunication service for VAT purposes or even a different type of service from the telecommunication service albeit in the same charging category. To all intents and purposes, when the customer was using the non-EU Roaming Calls VAS, they were enjoying precisely the same service as when they were making use of the Allowances in the UK. It is just that he or she was doing so in a different location. Thus, the FTT held that for a Type 2 Bundle which included the non-EU Roaming calls VAS, the VAT treatment should follow the analysis for Type 3 Bundles.

Type 3 Bundles (Roam Like Home)

Type 3 Bundles differed from the Type 2 Bundles which included the non-EU Roaming Calls VAS in that:

1. the ability to use the Allowances within a Type 3 Bundle was not restricted to telephone calls but included text messages and data;
2. use of the Allowances within a Type 3 Bundle was confined to specified non-EU countries; and
3. Roam Like Home was promoted extensively in Lycamobile’s leaflets and posters with the FTT finding as fact that its availability was important to customers who chose to acquire Type 3 Bundles.

The FTT held that the finding of fact at 3 made it more difficult to regard Roam Like Home as an ancillary element in a single complex supply than it was to regard the non-EU Roaming Calls VAS in that way. However, even if a right effectively to use and enjoy a telecommunication service in a country outside the EU is ancillary, the FTT held that the exercise of that right must still be taken into account for VAT purposes and cannot simply be treated for VAT purposes as being subsumed within the principal service.

Proceeding on that basis, the FTT held that supplies of Type 3 Bundles made on or after 1 November 2017 should be treated in the same manner as supplies of Type 1 Bundles because the use of Allowances within a non-EU country on and after that date did not change the place in which the supply comprising the sale of the relevant Type 3 Bundle was treated as being made. That place of supply was the UK.

However, in relation to supplies of Type 3 Bundles made prior to 1 November 2017, the "effective use and enjoyment" rule in paragraph 8 of Schedule 4A to the VATA applied. The Upper Tribunal held in Telefonica that a telecommunication customer had effective use and enjoyment of a telecommunication network for the purposes of paragraph 8 of Schedule 4A to VATA only to the extent that he or she actually accessed the network to make or receive telephone calls or send or receive text messages or data and did not do so merely by having the ability to take advantage of that facility. That meant that the "effective use and enjoyment" rule would make no difference to the VAT treatment applicable to a Type 3 Bundle supplied prior to 1 November 2017 where the relevant customer did not actually use the Type 3 Bundle to make a telephone call, send a text message or access data from within a non-EU country.

The FTT considered it necessary to consider how, in circumstances where a customer did actually use the Type 3 Bundle to access the network from within a relevant non-EU country prior to 1 November 2017, the "effective use and enjoyment" rule might change the analysis set out above in relation to the Type 1 Bundles. The FTT agreed with HMRC on this point that not only does the very existence of the "effective use and enjoyment" rule shed no light on the general question as to the nature and timing of supply but also that that rule did not prevent the whole of the consideration paid for a Type 3 Bundle from being subject to VAT in the same way as consideration paid for a Type 1 Bundle (because the supply of services comprising the sale of the Type 3 Bundle was made in the UK) but with a retrospective adjustment to that VAT to the extent (if any) that the Allowances within the Type 3 Bundle were effectively used and enjoyed within a relevant non-EU country.

It was common ground that there was no legislative basis within either the PVD or the VATA for any of the VAT chargeable in respect of a supply of a telecommunication service to be repaid following the time of supply to reflect the effective use and enjoyment of that service in a non-EU country following its time of supply. The FTT proceeded on the assumption that this is correct but recorded in passing that it is not immediately obvious to it why no such right to repayment would have arisen under Article 59a of the PVD and Section 80 of the VATA in those circumstances. That is because, in that case, the taxpayer would have accounted for VAT in respect of the relevant supply on the basis that it was made in the UK because that is where the supplier or the customer (as the case may be) belonged and then subsequently discovered that, contrary to its initial assumption, the place of that supply was in fact outside the EU and that therefore no VAT was due in respect of the supply. The FTT considered that could bring the terms of Article 59a of the PVD and Section 80(1) of the VATA into play retrospectively. Be that as it may, the FTT proceeded on the assumption that both parties were correct on this point. On the basis of that assumption, the FTT points out that the absence of any such provision in the legislation for a retrospective adjustment might be taken to support the proposition that the time of supply of a telecommunication service could never be made until the relevant service was effectively used and enjoyed.

After further lengthy reasoning, the FTT holds that Type 3 Bundles should be treated for VAT purposes in the same way as the Type 1 Bundles save only for the retrospective adjustment to the VAT payable in relation to Type 3 Bundles sold before 1 November 2017 for effective use and enjoyment of the relevant Allowances in a relevant non-EU country.

Issue 2 – whether a voucher

The voucher rules changed from 1 January 2019. Pre 1 January 2019, the FTT held that the critical part of Schedule 10A (voucher rules) is the requirement in paragraph 1 of the schedule to the effect that the right to receive services represented by the voucher needed to be "to the value of an amount", i.e., limited by reference to a monetary value. The FTT held that no such amount was recorded in the case of a Plan Bundle. Instead, the customer's entitlement to future services under the Plan Bundle was expressed in terms of remaining available Allowances. The FTT held that the Plan Bundle may have been sold for a monetary amount at inception but thereafter it carried an entitlement to Allowances and it was those Allowances, and not a monetary amount, which were reduced through usage and could be exhausted.

The FTT held that the fact that the Plan Bundles were not monetary amounts meant that the services had already been supplied. For that reason, the FTT held that the entitlements did not represent the right to receive future services, as required by condition 2, but instead represented the product of services which had already been supplied. The FTT stated that the fact that it might have been possible to do a calculation and convert the Allowances which remained into a monetary amount is insufficient (LeisurPass 1). Further, even if it were possible to express the entitlements which remained from time to time in monetary terms, any monetary amount so calculated was not shown on the Appellant's system and therefore condition 4 was not satisfied, even after taking into account the extended meaning of the term "stated on it or recorded in it" applied by the FTT in Skyview Ballooning.

In summary, as condition 2,3 and 4 of Schedule 10A VATA 1994 were not met, the Plan Bundles were not vouchers.

Post 1 January 2019, the FTT held that the use by a customer of entitlements which he or she has acquired on the purchase of a Plan Bundle cannot be said to involve an acceptance by the Appellant of the Plan Bundle as consideration for the services reflecting those entitlements without an unacceptable level of intellectual gymnastics. The entitlements under the Plan Bundle required the Appellant to provide services but to describe the exercise of those entitlements as involving the acceptance by the Appellant of the Plan Bundle as consideration for those services would be a misnomer.

The FTT also had some reservations about the ability of the Plan Bundles to meet the first condition of 10B, i.e., it did not consider that a Plan Bundle can properly be described as an "instrument". It would not naturally fall within the meaning of that word and the FTT was not persuaded that the European Commission's statement advanced the Appellant's case on that front. The "prepaid telecommunications credits" to which the European Commission referred in that statement clearly related to pay as you go or top up credits such as the PAYG credits utilisable by customers of the Appellant who did not have Plan Bundles. There is a significant difference between a PAYG credit and an entitlement under a Plan Bundle in that the former was a monetary amount which could be used to acquire telecommunication services at the applicable rate at the time when they were used and were consequently reduced. It is not hard to see why the use of PAYG credits in that manner should be treated as the acceptance by the Appellant of an instrument as consideration for the provision of the telecommunication service in question. The use of the PAYG credits was not very different from the use of the visitor card in Stockholm. However, that is a far cry from the performance by the Appellant of its contractual obligation to enable the relevant customer to use the entitlements under the Plan Bundles which the customer had already acquired.

Even if it was wrong on the above and the Plan bundles did constitute vouchers under Schedule 10B, the FTT concluded that they would not have been multi-purpose vouchers. They would have been single purpose vouchers as once the sports update VAS and the IAT VAS are disregarded by virtue of having been ancillary elements in a single composite supply of telecommunication services, all of the services supplied pursuant to the Plan Bundles fell within the same supply category (telecommunication services) and all of those services were supplied in the UK (by 1 January 2019, the effective use and enjoyment rule was no longer applicable and therefore the fact that the customer belonged in the UK determined that the place of supply of those services was the UK).

Summary Conclusion

• Type 1 Bundle - VAT was chargeable on the full amount of consideration which was paid by the relevant customer in return for the Type 1 Bundle, regardless of the extent to which the customer subsequently exercised his or her entitlement to Allowances under the Type 1 Bundle.
• The same conclusion applies to:

1. a Type 2 Bundle which did not include the non-EU Roaming Calls VAS;
2. a Type 2 Bundle which did include the non-EU Roaming Calls VAS and was issued on or after 1 November 2017; and
3. a Type 3 Bundle which was issued on or after 1 November 2017;

• In relation to a Type 2 Bundle and a Type 3 Bundle other than those above, VAT was chargeable on the full amount of consideration which was paid by the relevant customer in return for the Type 2 Bundle or the Type 3 Bundle, regardless of the extent to which the customer subsequently exercised his or her entitlement to Allowances under the relevant bundle, provided that a subsequent adjustment to the VAT chargeable should have been made to reflect the extent to which the non-EU Roaming Calls VAS (in the case of a Type 2 Bundle) or Roam Like Home (in the case of a Type 3 Bundle) was exercised in a non-EU country; and
• The VAT analysis was not affected by the voucher legislation in Schedule 10A or the voucher legislation in Schedule 10B.

The FTT concluded it is now a matter for the parties to seek to agree on the question of best judgment and matters of quantum.

The FTT proceeded on the basis that in terms of the time of supply of a Plan Bundle, no distinction should be drawn between the time when a Plan Bundle was made available to the customer and the consideration for that Plan Bundle was paid; and the time when that Plan Bundle was activated. However, a Plan Bundle may well have been made available to the customer, and payment for the Plan Bundle may well have been made before the Plan Bundle was activated. The FTT proposed to leave the implications of that difference to be resolved in the first instance by the parties when they seek to agree quantum.

For further information, please contact Alex Hale.

HMRC has published guidance on details you need to give to digital platforms when selling goods or services on a digital platform. The rules relate to the OECD reporting rules for platforms which came into effect from 1 January 2024 (similar to DAC7 in EU). The guidance includes details on:

• Who is a seller
• Information you must give
• Reporting by platforms
• Selling online and paying tax

If you sell on digital platforms, the platform operator may need to:

• collect and check specific details about you
• report details to HMRC

For further information, please contact Gaurav Patney or Ethan Ding.

Tanzania

The recently passed Finance Act, 2024 is aimed at stimulating economic growth and productivity across key sectors for revenue enhancement and business climate improvement. This Tax Alert highlights key aspects of the Finance Act, 2024 and their implications. There are numerous updates from an indirect tax perspective, including: VAT registration intending traders failure to notify measures, a change to the definition of electronic services to incorporate services delivered through the internet and to include online data services, a new gaming supply definition, and clarity on supplies of gaming activities that are exempt from VAT, a definition for serviced apartments, changes to zero-rated and exempt supplies.