Vouching for telecommunications

When does a payment for a bundle of services trigger an obligation to account for VAT? This is the somewhat straightforward, and simultaneously highly complex, question asked of the First-tier Tribunal in the recent Lycamobile UK Limited decision. HMRC successfully argued that VAT must be accounted for immediately because of its perception of the consumer’s view of the services. However, in this case it resulted in a VAT refund in some circumstances that VAT law doesn’t anticipate.

What was happening?

Lycamobile operates as a Mobile Virtual Network Operator (or MVNO); in essence this means that it provides telecommunications services like a mobile operator (eg Vodafone) without owning the infrastructure necessary to deliver those services. During the period of the claim from 2012 to 2019, similarly to its competitors, Lycamobile offered customers Pay-As-You-Go credits or ‘Plan Bundles’, which amounted to a variety of services for a fixed fee.

The 58-page decision provides an overview of the various Plan Bundles and promotions that were offered to consumers during the period in question. A wide range of options were available comprising various combinations of the usual ‘core’ mobile phone services: allocations of minutes, texts and data. However, these allocations could be used as credits to purchase other services and, critically, some of these services were outside the scope of UK VAT. 

What was the argument?

It was accepted that top-up payments on a Pay-as-You-Go plan could be treated as multi-purpose (or retailer) vouchers for VAT purposes – thus, VAT was only due when the credit was redeemed and not when the credits were purchased. Lycamobile argued that its Plan Bundles should also be regarded as vouchers and thus there was no requirement to account for VAT when the Plan Bundle was purchased. Instead, VAT was due when (and to the extent that) the services in the bundle were accessed. To demonstrate the effect of this difference, the court noted that the total amount of VAT in dispute was £51m.

The basis for Lycamobile’s argument was that the price paid for the Plan Bundle could not be subject to UK VAT when the monies were collected from the customer, on the grounds that the VAT treatment of the supplies in question were not known at that point. Instead, much like a face-value voucher that can be redeemed to purchase items with different VAT rates, VAT must be accounted for on redemption.

HMRC rejected Lycamobile’s contention on the grounds that, from the perspective of the consumer, they were purchasing access to Lycamobile’s service which should be regarded as being subject to VAT at the standard rate. Interestingly, to deal with the fact that some services should not be subject to VAT, HMRC stipulated that Lycamobile would be entitled to claw back the VAT overpaid on these services after the event. 

As Lycamobile noted during the hearing, there is no legislative provision which provides for this approach.

What happened? 

After considering two sets of changes in legislation, one procedural issue pertaining to some of the bundles and c.20 previous VAT decisions from the UK and European courts, the tribunal found in favour of HMRC. While the court accepted that previous decisions concerning the purchase of points for domestic and foreign accommodation bookings (MacDonald Resorts) and credits for viewing or downloading records (Findmypast) could be regarded as analogous to a voucher, Lycamobile’s appeal had failed. 

The reason for drawing this distinction is that the promotional material suggested that a consumer’s view would be that it was purchasing VATable access to a telecommunications service. The fact that some, non-VATable services could be purchased was not clear, and so was not regarded as being critical to the consumer. Thus, unlike these previous cases, Lycamobile’s charge should not be treated like a voucher. 

What can we learn?

Vouchers have many attractive characteristics for VAT purposes. However, a business considering relying on this treatment must be able to evidence that its customers think of its service as equivalent to a voucher.