VAT – Phone Cards

Introduction

This case deals with phone cards which were sold in the UK but related to calls in other EU countries etc. The VAT treatment of the phone cards was considered. Key to the decision was the place of supply rules for telecommunications and cards redeemable with service providers who “belong” in other Member States, i.e. was the service supplied in that Member State?

The Facts

The taxpayer ran a shop in which he sold phone cards. Some phone cards provided cheaper calls to European destinations, others to Asian destinations and others to African destinations. The phone cards generally had a face value of £3 or £5. They were sold at face value or a slightly lesser amount. The taxpayer bought each phone card for about 10p or 20p less than the amount for which he sold it. The vendors of the phone cards came to the shop every day. The taxpayer accepted a batch of cards and the vendor would return at the end of the day to collect monies equal to the agreed purchase price of the cards that had been sold.

The VAT & Duties Tribunal decided that although the taxpayer bought and sold phone cards in London, some of those supplies fell to be treated as if they had been supplied in other EU Member States and were hence outside the scope of VAT chargeable in the UK. HMRC appealed to the High Court.

The Issue

The issue in this appeal was the correct VAT treatment of the supply of the phone cards.

The Decision

The VAT Act distinguished between two kinds of supply: (a) the initial issue of a voucher and (b) a subsequent supply of it. This case was concerned with subsequent supplies of vouchers already issued. The Schedule to the VAT Act also distinguished between two kinds of voucher: a credit voucher and a retailer voucher. Whether a voucher was a credit voucher or a retailer voucher depended on who issued it. It did not depend on who supplied it to the end-user. Thus although the taxpayer did not issue any vouchers, some of the vouchers that he supplied to his customers were credit vouchers and others were retailer vouchers.

The VAT treatment of a credit voucher was as follows: the consideration for the voucher was disregarded (except to the extent that it exceeded the face value), both on the issue of the voucher and on any subsequent supply of it. In this particular case, the taxpayer's position was that he did not have to pay VAT, as long as he bought and sold them for less than their face value. However, where the person who ultimately provided the goods or services did not account for VAT, the taxpayer was liable for VAT.

The VAT treatment of a retailer voucher was as follows: the consideration was only disregarded on the initial issue of the voucher. In this particular case, the phone cards could only be used to obtain telecoms services which were standard rated. Therefore the taxpayer's supply of phone cards was chargeable at the standard rate. However, he could deduct input tax on the amount that he had paid for the phone cards. HMRC contended that the taxpayer was liable for VAT on the supply of all the retailer vouchers that he supplied in the periods of assessment under appeal.

The Court examined the place of supply rules in relation to telecommunications. Under the primary place of supply rule in force at the relevant time it was clear to the Judge that the taxpayer “belonged” in the UK, and hence any supply by him took place in the UK. On the face of it, therefore, he would be liable to pay VAT on his supplies. However, Article 21 (1) of the Place of Supply Order provided:

“The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not the right is exercised).”

The following is a quote from the case on the interpretation of the above:

“As I see it, what this is saying is that A is the same as B, where A is the place of supply of a right to services and B is the place of supply of those services. If A = B, then one can identify A, in which case identification of A will automatically identify B. Or one can identify B, in which case identification of B will automatically identify A.”

The Judge said that on any ordinary view of the facts the place of supply of the phone cards was the UK. This resulted in the place of supply of the telecoms services also being treated for VAT as being the UK. It was treated as a matter of fact the place of supply of the right to the services was the same as the place of the supply of the services themselves. Hence, reverting to the Judge's algebraic expressions, he said that based on the facts, A = B. Both A and B were the UK.

On the basis of the above, the High Court allowed HMRC's appeal.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/1077.html.