Judgment summary
Lycamobile UK Limited (LMUK), a mobile virtual network operator, sold various "plan bundles" giving customers allowances of telephone calls, texts and data for a fixed period, sometimes with access to additional value added services (VAS). HMRC assessed LMUK for VAT of over £50 million for periods between 2017 and 2019 on the basis that VAT was due when a bundle was sold, regardless of subsequent use [2].
The First-tier Tribunal (FTT) dismissed LMUK's appeal on 18 July 2024, holding that VAT arose on sale of the bundles, save that an adjustment was required for certain bundles to reflect effective use and enjoyment of roaming allowances outside the EU before 1 November 2017 [2], [11].
On appeal to the Upper Tribunal, LMUK argued across four grounds that VAT should only be chargeable when and to the extent allowances were actually used, that VAS should not automatically be treated as ancillary, and that the bundles were "vouchers" for VAT purposes both before and after 1 January 2019. HMRC cross-appealed on one narrow point concerning Type 2 Bundles. The Upper Tribunal dismissed all grounds of LMUK's appeal and dismissed HMRC's cross-appeal [137].
Background
LMUK is part of an international group of connected companies operating as one of the largest mobile virtual network operators (MVNOs) in the UK, supplying telecommunication services using the infrastructure of network operators such as Vodafone, O2 or EE [6(1)-(2)].
Customers acquired SIM cards and could use credits either as "Pay As You Go" (PAYG), paying at the prevailing price for services used, or to acquire Plan Bundles [6(3)-(4)]. Plan Bundles lasted for a specified period, generally 30 days, and entitled the customer to specified or unlimited Allowances of calls, texts and/or data; unused Allowances were lost at the end of the period, unlike PAYG credits [6(6)-(7)].
More than 60 types of Plan Bundle were available at any one time [6(12)]. The FTT categorised bundles as Type 1 (allowances only), Type 2 (allowances plus VAS, such as horoscope/joke or virtual doctor Subscription Services, unless the customer opted out) and Type 3 (bundles including a "Roam Like Home" feature) [6(13)-(14)], [7]-[8].
Figures produced by LMUK indicated that, on average, only around five to ten per cent of the Allowances in a Plan Bundle were actually used [6(26)].
Core dispute
The FTT addressed two issues: first, what service LMUK supplied when it sold a Plan Bundle and when that service was supplied ("Issue One"); second, if Issue One were decided for HMRC, whether a Plan Bundle was a face-value voucher such that VAT was chargeable only on use rather than on issue ("Issue Two") [10].
On appeal, LMUK raised four grounds. Ground 1 contended that VAT was chargeable only if, and to the extent that, Allowances were actually used to receive VAT-able services, not on sale or activation of any bundle. Ground 2 contended that the FTT erred in treating VAS as ancillary to the Allowances. Ground 3 contended that bundles sold or activated on or after 1 January 2019 were electronic multi-purpose vouchers within Schedule 10B VATA. Ground 4 made the equivalent argument for bundles sold before that date under Schedule 10A VATA [12].
HMRC cross-appealed on the ground that the FTT erred in finding that, for Type 2 Bundles including the non-EU Roaming Calls VAS, a subsequent VAT adjustment was needed for calls made from outside the UK prior to 1 November 2017 [13].
Court findings
On Ground 1, the Upper Tribunal held that the FTT correctly directed itself in law and reached the right conclusion that the "real supply" occurred on sale of a Type 1 Bundle, not on subsequent use of Allowances. The authorities relied on by LMUK (including MRL, BUPA, Findmypast and Go City) established a principle relevant to the prepayment rules, not a general rule that uncertainty prevents identification of a supply. Reciprocity was necessary but not sufficient to identify the real supply, and the FTT's approach of asking what the customer's real purpose was in paying was correct [74]-[80].
On Ground 2, the Tribunal upheld the FTT's finding that, for Type 2 Bundles, the VAS (other than the non-EU Roaming Calls VAS) were ancillary elements of a single composite supply of which the Allowances were the principal element, so the VAS shared the same VAT treatment as the Allowances [82]-[89].
On Ground 3, the Tribunal agreed with the FTT that Plan Bundles did not satisfy the second and third conditions for a "voucher" under Schedule 10B VATA, because it was incoherent to describe use of Allowances as LMUK accepting an instrument as consideration for services which were, in substance, already supplied on sale of the bundle [102]-[107].
On Ground 4, the Tribunal held that Plan Bundles failed to satisfy conditions 2, 3 and 4 for a face-value voucher under Schedule 10A VATA, since the entitlements were not monetary amounts to be used to purchase future services and represented services already supplied, unlike PAYG credits [119]-[123].
On HMRC's cross-appeal, the Tribunal found that the FTT was entitled to conclude that use of the non-EU Roaming Calls VAS was, in substance, use of the same service as the principal Allowances (merely enjoyed from a different location), so the effective use and enjoyment adjustment applied to Type 2 Bundles containing that VAS in the same way as to Type 3 Bundles [131]-[135].
Outcome
LMUK's appeal was dismissed on all four grounds. HMRC's cross-appeal was also dismissed. The Upper Tribunal upheld the FTT's conclusions that VAT was chargeable on the full consideration paid on sale of Type 1, Type 2 and Type 3 Bundles (subject to the adjustment for non-EU roaming use before 1 November 2017), and that the voucher legislation in Schedule 10A and Schedule 10B VATA did not alter that analysis [137].
Major issues / areas of contention
- Whether VAT became chargeable when LMUK sold a Plan Bundle or only when, and to the extent that, the customer later used the Allowances.
- Whether value added services (VAS) included in Type 2 Bundles were properly treated as ancillary to the Allowances within a single composite supply.
- Whether Plan Bundles sold or activated on or after 1 January 2019 were electronic multi-purpose vouchers within Schedule 10B VATA, deferring the VAT charge until use.
- Whether Plan Bundles sold or activated before 1 January 2019 were face-value vouchers within Schedule 10A VATA.
- Whether the FTT was right to require a retrospective adjustment for effective use and enjoyment of the non-EU Roaming Calls VAS in Type 2 Bundles prior to 1 November 2017.