Lycamobile UK Limited v The Commissioners for HMRC

LMUK argued that all three of the different Plan Bundles were only chargeable to VAT if and to the extent that the Allowances were actually used by customers to receive services which were liable to VAT, and not on sale of a bundle.

Mr Rivett said that the Opinion of the Advocate General in GE AES illustrates that there are two types of rights for VAT purposes:

“as such rights” which are taxable when the rights are transferred, and

“rights to future supplies” which are not taxable when transferred unless all relevant information about the future supplies is already known. Examples of cases falling within this category include MRL, [FMP] and most recently [Go City]. (Footnote: ⁵)

Mr Rivett submitted that LMUK’s position was similar to that in MRL, and the “real service” was the actual use of Allowances. He said that MRL also established that a tax point for VAT could not arise until all relevant information in relation to the supply was established. That was also made clear in BUPA and Marcandi. These principles were also applied in FMP and Go City. To the extent that H3G suggested otherwise, it was wrongly decided.

Applying those principles in this case, argued Mr Rivett, Plan Bundles are plainly rights to future services and the purchase of a Plan Bundle is a preliminary transaction, because acquiring the rights within a Plan Bundle is not an aim in itself for customers. Plan Bundles are comparable to PAYG credits and the “real supply” occurs only when and to the extent that Allowances are in fact used.

Further, he said, the purchase of a bundle cannot give rise to a tax point because at that stage LMUK did not have “all the relevant information concerning the chargeable event”. In particular, FMP shows that uncertainty as to usage is an important factor. The uncertainty was even greater in relation to Type 2 and Type 3 Bundles, because LMUK did not know which of the many services available would in fact be selected, and some of those services might not even be subject to VAT. In oral submissions, Mr Rivett said that it is not possible to have a VAT supply where there is any uncertainty as to what is supplied.

The analysis contended for by LMUK, said Mr Rivett, is entirely consistent with VAT being a tax on consumption. The fact that no VAT charge would accrue in respect of unused rights was expressly recognised in MRL and FMP; the FTT erred in trying to avoid this conclusion by “filling in the gaps” in the law.

Mr Rivett argued that the FTT erred in concluding that receipt of the Allowances was the customer’s purpose. The rights to the Allowances were not acquired for their own sake; “the customer’s sole aim in acquiring a Plan Bundle was to use the allowances to receive one or more of a number of future services”. (Footnote: ⁶) The FTT erred in relying on Lebara and Kennemer in reaching its conclusion to the contrary. It also erred in stating that the extent of use was irrelevant, because that was contrary to the Court of Session’s decision in FMP. Plan Bundles had no inherent value to customers beyond the ability to use the allowances.

The FTT also erred, said Mr Rivett, in relying on the fact that there was a legal relationship of reciprocity when the bundle was acquired, because that is the case whenever a right is acquired, and it sheds no light on the real supply. If a contract for the grant of a right supported by consideration was enough to trigger a tax point, BUPA, MRL, FMP and Go City would all have been wrongly decided.

Mr Rivett argued that the necessity found by the FTT for a non-statutory retrospective adjustment in relation to Type 2 and 3 Bundles indicated the FTT had gone wrong. Finally, he said, the FTT’s analysis gave rise to a number of practical difficulties.

Ms Mitrophanous approached the question in a different way. In her submission, there were four questions which logically arose. First, what is the supply? This may involve considering whether there is a single supply or a composite supply. Second, what is the rate of VAT on that supply? Third, what is the place of supply? Fourth, when is HMRC entitled to the VAT: is it at the time of supply, or on prepayment if there is one?

She argued that the key issue in determining the first question was reciprocity, and establishing when the necessary reciprocity arose. She rejected Mr Rivett’s position that there were two types of case—in fact, all the cases asked and answered the reciprocity question. The cases in which there was a preliminary step of supplying a means of payment to the customer were unusual, because in the vast majority of cases there was no such preliminary step. In this appeal, she said, there is no such preliminary step, but rather the true supply (of allowances) is selected, fixed and paid for at the outset. Most Plan Bundles are materially under-utilised, because what is being paid for is guaranteed availability at a fixed price.

Ms Mitrophanous said that in practice supplies of guaranteed availability/access were not unusual. Examples might include air tickets, theatre tickets, streaming bundles such as Netflix and gym membership.

She argued that the authorities illustrate that it is always possible to make a VAT supply of availability, with actual use being irrelevant. Examples include Lebara, Kennemer, AirFrance and Vodafone. Other authorities were cited to us to support this.

The key issue, in this appeal and under Ground 1, is whether VAT arises when Plan Bundles are sold or only when and if used. Notwithstanding the extensive submissions which we heard from counsel, it is important not to lose sight of the fact that this is a simple question. Since this is an appeal and not a rehearing, it is also essential to consider the way in which the FTT approached that question, and whether in doing so they erred in law.

It is helpful to bear three points in mind in considering the authorities, namely:

Turning now to the Decision, having set out relevant case law in some detail, the FTT discussed the identification of the supply by LMUK (in relation to Type 1 Bundles) at [95]-[119]. It described the exception to the basic rule that VAT becomes chargeable on supply which can arise where there is a prepayment. It then prefaced its discussion as follows, at [100]:

The FTT expanded on this by explaining that MRL was not a prepayment case, but simply referred to the prepayment position to support its identification of the real supply: [101]. The FTT rejected Mr Rivett’s submission that “that there is an overarching principle within the VAT legislation (supported by CJEU case law) to the effect that the tax point for a supply of services can never arise until all the relevant information in relation to the relevant supply is known”: [102]. It followed that the extent and nature of any uncertainties in relation to a Type 1 Bundle were irrelevant; all that was required was to identify the real supply being made: [103].

The FTT continued, at [104]:

The right approach, said the FTT, was first to identify the true nature of the supply, and then the tax point for that supply. That was the approach taken in FMP, in which the Court of Session placed no reliance in its conclusion on any uncertainties as to the relevant supply: [106]-[107].

In an important passage, at [108], the FTT described the approach it would take to applying the legal principles to the facts:

At [109], the FTT found that, having carried out that process, there was only one answer, which was that the sale of the Type 1 bundles amounted to the “real supply”. Receipt of the Allowances was the customer’s purpose in buying the bundle. The Allowances conferred the right to use, and the extent of actual use was irrelevant: [109] and [111]. When a bundle was acquired, there was a legal relationship of reciprocity between the customer and LMUK and a direct link between the consideration paid and the Allowances: [112]. VAT therefore arose at the point of sale.

The FTT rejected Mr Rivett’s parallels between the facts in the appeal and MRL and FMP. In those cases, at the initial stage the customer had only acquired a “currency” which was of no inherent value: [113]-[115]. The FTT considered that the Allowances in a Type 1 Bundle were also completely different from PAYG credits: [118].

In our opinion, the FTT correctly directed itself in law, properly applied that law to the facts and reached the right conclusion on this issue. In particular, the FTT was right to reject Mr Rivett’s arguments. First, the authorities do not support a general proposition that there can be no supply so long as any uncertainties remain as to the terms of the supply. As the FTT pointed out, that is a proposition which has been developed in relation to the potential application of the prepayment rules, not to the identification of the supply. Indeed, if Mr Rivett’s argument were correct, it is difficult to see how there could ever be a supply of availability or access; when I pay my monthly subscription for a streaming service, it is impossible to know how much, if at all, I will use that service. Second, while the authorities do indeed include cases in which there has been held to be a preliminary supply of some sort of currency, with the real supply occurring at a later stage, those decisions turned entirely on their facts. Mr Rivett’s continued assertion that there was no inherent value in the Allowances is no more than assertion. The FTT was entitled to find on the facts that what customers were contracting for in buying Plan Bundles was guaranteed availability, at a fixed price, for a fixed period. Indeed, although the FTT did not rely on this in reaching its decision, we consider that the FTT’s finding of fact (at [16(26)]) that, on average, only 5 to 10% of the Allowances in a Plan Bundle were actually used is, at the very least, consistent with the FTT’s conclusion.

Mr Rivett’s submissions that there were “two types of case” and that the FTT was wrong to draw analogies with the authorities which it did are in substance an assertion that the facts in this appeal are analogous to those cases in which a preliminary supply of currency was found to arise. However, we agree with Ms Mitrophanous that the facts found by the FTT simply do not make that assertion good.

Mr Rivett referred to various authorities under Ground 1. He relied on MRL, BUPA and FMP as support for the principle that there cannot be a supply when any relevant uncertainties exist, but as the FTT explained, those authorities set out that principle in relation to the prepayment rules, not the identification of the supply. Go City was simply an example of a case which on its facts was held to be on all fours with MRL, so it does not further Mr Rivett’s arguments. He challenged the correctness of the FTT’s decision in H3G, but this is an appeal against the Decision, not against H3G, and we need make no comment on that decision. Mr Rivett criticised the FTT for relying (at [109]-[110]) on Lebara as support “for treating all rights to telecommunication services as the “real supply”…regardless of the customer’s ultimate aim” (Footnote: ⁷), but the FTT did not reach or support any such conclusion. Mr Rivett said that the FTT erred in drawing a comparison between LMUK’s supplies and those in Kennemer, since separate admission fees were charged in Kennemer in addition to the membership fees, and that was the reason for the CJEU’s decision. We disagree. First, the CJEU did not rely on that fact in reaching their decision. Second, as a matter of principle a supply of availability/access does not lose that characterisation because a separate fee may be included as part of the arrangement; a monthly access fee might, for instance, be supplemented by additional charges for premium services. Finally, Mr Rivett said the FTT was wrong on the facts to distinguish Go City, FMP and MRL, and also to draw an analogy with Marcandi. For the reasons we have explained, we consider that the FTT was justified in reaching the conclusions in relation to those decisions which it did.

While we have concluded that the FTT’s approach involved no error of law, it is important to record that we do not accept Ms Mitrophanous’ submission in this appeal that the process of identification of the real supply is driven by the point at which reciprocity arises.

It is well established that reciprocity is an aspect of the “direct link” which must be present in order for a supply of services to be “for consideration” for VAT purposes. As the CJEU explained in Kennemer, at paragraph 39:

However, Ms Mitrophanous’ proposition in effect confuses cause and effect. We agree with Mr Rivett that reciprocity is a necessary element of the existence of a supply on which VAT is due but it is not sufficient. In particular, it does not tell us what the real supply is in any particular case. It is indeed referred to in the numerous authorities to which we were taken by Ms Mitrophanous, but that is because it is necessary for it to be present for the reasons we have explained, so it is entirely unsurprising for its presence to be considered by the relevant court or tribunal. That is what the FTT did in this case, quite correctly, at [112]. However, it does not provide the route to identification of the real supply. The FTT’s approach was the way to answer that question.

Our conclusion is not affected by subsidiary arguments raised by Mr Rivett in challenging the FTT’s decision:

The appeal under Ground 1 is dismissed.

In relation to Type 2 Bundles, the FTT considered that the availability of the VAS potentially affected the applicability of the analysis which it had reached regarding the supply made under Type 1 Bundles. The FTT set out (at [121]) seven factors in relation to VAS, and then concluded as follows (at [122]):

The FTT correctly noted that for VAT purposes the ancillary elements within a single composite supply share the same VAT treatment as the principal element within that supply. Consequently, for most of the VAS, those VAS would fall to be disregarded for VAT purposes because they were merely ancillary elements in a single composite supply of telecommunications services. So, Type 2 Bundles were to be analysed in the same way as Type 1 Bundles, with VAT arising on sale of the bundle: [124] and [184].

The FTT decided that this analysis required modification in relation to the non-EU Roaming Calls VAS, but although that is relevant to HMRC’s cross-appeal it is not relevant to Ground 2.

Mr Rivett spent relatively little time on Ground 2 in his oral submissions, but his skeleton argument asserted that in reaching the above conclusion the FTT made the following errors of law:

A number of these arguments effectively fall away in light of our rejection of Ground 1. Argument (1) has no force if, as we have found, the FTT was correct to treat the real supply as arising on the sale of a plan bundle. Argument (2) fails in view of our conclusion that the FTT was correct to reject Mr Rivett’s proposition regarding uncertainties preventing a supply from arising; that argument is wrong, and does not become right simply because the number or range of uncertainties is increased, as it is by the addition of the VAS in Type 2 Bundles.

Similarly, argument (5) falls to be rejected because the real supply is not the actual use of an allowance, of whatever category, but the sale of a plan bundle. Once that proposition is found to be correct, there is no illogicality or absurdity in failing to track the VAT consequences of individual instances of usage.

It appears that under Ground 2 LMUK also challenges the FTT’s decision to categorise VAS as separate, because they are just another way of using Allowances. In oral submissions. Mr Rivett appeared to suggest that the FTT’s decision in this respect was illogical, because it was inconsistent with the decision to treat VAT as arising on sale, with actual usage being irrelevant. If it is being argued that the FTT could not logically have decided to treat VAS as a separate element in a Type 2 Bundle in view of its decision that there was a single supply on sale of a bundle, we disagree. First, we have found that the FTT’s conclusion that there was single supply, arising on sale of a bundle, was correct. Second, The CJEU authorities (Footnote: ¹⁰) clearly establish that, having established the existence of a supply, it may be necessary where that supply has a number of elements to consider whether it is a single composite supply, consisting of a principal element and an ancillary element. As HMRC pointed out, the FTT might also have taken the view that in relation to Type 2 Bundles there was a single composite supply made up of a predominant element (again, the Allowances) and a minor element (again, the VAS). If the FTT had taken that approach, its analysis of the VAT treatment of Plan 2 Bundles would have been the same.

Given our rejection of the appeal under Ground 1, the FTT’s conclusion, at [124], 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” was, in our opinion, a rational decision which was justified by the factors and reasoning set out at [121]-[122].

The appeal under Ground 2 is dismissed.

As we will see shortly, Ground 4 deals with the voucher position prior to 1 January 2019.

Ground 3 is that Plan Bundles sold or activated on or after 1 January 2019 were “electronic multi-purpose vouchers”, so the consideration paid by customers for their purchase fell to be disregarded and VAT only became chargeable to the extent that the Allowances were actually used to obtain services.

For the period after 1 January 2019, the PVD was amended by Council Directive 2016/1065 (the “Voucher Directive”). As the FTT explained, at [143]-[144]:

In order to reflect the amendments to the PVD made by the Voucher Directive, the VATA was amended by the introduction of Schedule 10B of the VATA (“Schedule 10B”) in relation to vouchers issued on or after 1 January 2019. The relevant provisions of Schedule 10B are as follows (taken from the FTT’s helpful summary):

The FTT adopted the following description by Mr Rivett of the five conditions imposed by Paragraph 1 of Schedule 10B in order for Plan Bundles to be vouchers for the purposes of that schedule:

In addition, in order to qualify for the VAT treatment contended for by LMUK, the vouchers needed to be “multi-purpose vouchers”.

The FTT concluded that Plan Bundles did not qualify as vouchers for the purposes of Schedule 10B. The FTT considered that Plan Bundles would not satisfy the second and third conditions, stating as follows (at [178]-[179]):

The FTT added that it also had “some reservations” about the ability of Plan Bundles to meet the first condition, because it was not persuaded that a Plan Bundle could properly be described as an “instrument”: [180]-[181].

For good measure, the FTT stated that in any event Plan Bundles would not have been multi-purpose vouchers: [182].

In relation to Ground 3, LMUK argued as follows:

We can deal with Ground 3 relatively briefly.

We share the FTT’s scepticism as to whether a Plan Bundle is or includes an “instrument”. As the FTT said at [181], a Plan Bundle does not naturally fall within the meaning of that word, unlike a PAYG credit, which, as the FTT put it, “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”. Indeed, it is not completely clear precisely what the “instrument” is said to be.

However, even if we were to assume, in LMUK’s favour, that a Plan Bundle satisfied the first condition, we consider that the FTT was clearly correct in its conclusion at [178]-[179] (set out above) that a Plan bundle does not satisfy the second and third conditions in Schedule 10B, or the equivalent wording in the PVD.

We entirely agree with the comments and reasoning of the FTT set out at [178]-[179], which are reinforced by two further points.

First, the FTT’s analysis is consistent with the analysis which we have found to be correct of the “real supply” (Ground 1). The transaction between LMUK and a purchaser of a Plan Bundle is not the supply of allowances, when and if used, but the supply of availability, being a supply which arises on sale of a Plan Bundle. To describe that as then entailing an obligation on LMUK to accept an instrument as consideration for the provision of the supply of services, when the services are the availability, is incoherent.

Second, as Ms Mitrophanous stated, LMUK have pointed to nothing in the contractual position or economic reality which supports their voucher analysis. Mr Rivett suggested that the necessary obligation must exist because LMUK is contractually obliged to allow customers to use the services under a Plan Bundle, but that is the case in any contract and is not an indicator of the presence of a voucher mechanism.

Our conclusion means that we need not comment on the FTT’s analysis of whether a Plan Bundle was a multi-purpose voucher, and we do not do so.

The appeal under Ground 3 is dismissed.

Ground 4 is that Plan Bundles sold or activated prior to 1 January 2019 were electronic multi-purpose vouchers within Schedule 10A VATA. Consequently, the consideration paid by customers for the purchase of Plan Bundles fell to be disregarded and VAT only became chargeable to the extent that the Allowances were in fact used to obtain services.

The PVD did not make provision for vouchers prior to 1 January 2019. However, Schedule 10A VATA contained the following provisions relevant to vouchers issued prior to that date:

The FTT adopted Mr Rivett’s description of the requirements for Plan Bundles to be face-value vouchers within Schedule 10A (Footnote: ¹¹):

In addition, in order to fall within Schedule 10A Plan Bundles needed to be “retailer vouchers” and not to be single-purpose vouchers.

Having first noted that it was unclear which instrument or Allowance or unit was claimed to be a “voucher”, the FTT concluded that it made no difference, because in every case the same defect would arise, as stated at [171]:

The FTT considered that as a result Plan Bundles failed the requirement in condition 3 that the right to receive services needed to be “to the value of an amount”, meaning limited by reference to a monetary value. Instead, the customer’s entitlement to future services under the Plan Bundle was expressed in terms of remaining available Allowances. There was no monetary amount which was reduced. This was “wholly unlike” the position in relation to PAYG credits: [172].

The FTT also decided that, even if it were possible to do a calculation to express remaining entitlements in monetary terms, any monetary amount so calculated was not shown on LMUK’s system. This meant that condition 4 was not satisfied.

The FTT added a further reason why Plan Bundles did not satisfy Schedule 10A (at [176]):

So, concluded the FTT, Plan Bundles failed to satisfy any of conditions 2, 3 or 4: [177].

Mr Rivett argued as follows:

In our opinion, it is clear that Plan Bundles were not vouchers within Schedule 10A.

The Plan Bundles plainly failed to satisfy condition 2, for the reason given by the FTT at [176]. As we have found in relation to Ground 1, the FTT was correct to regard the true supply as the sale of a Plan Bundle. It follows that Plan Bundles could not satisfy the requirement that they represent a right to receive goods or services to the value of an amount stated on or recorded in the Plan Bundle, because the services have already been supplied in full when LMUK sells a Plan Bundle. Plan Bundles are not vouchers to be exchanged for future services; they represent services which have already been supplied.

What the FTT rightly describes as this “simple fact” is sufficient to dispose of Ground 4. Since we heard argument on the FTT’s other reasons for reaching its decision, we will comment briefly on those arguments.

We consider that the FTT was right to conclude that Plan Bundles also failed to satisfy condition 3, because a customer’s right to Allowances was nowhere stated or recorded by reference to a monetary value. In other words, if I paid £15 for a 30-day Plan Bundle, then as I used my Allowances throughout that 30 days what was recorded was how much of each Allowance I had used and how much remained. How much of my £15 remained in monetary terms was not recorded or stated as such. The FTT rightly contrasted the position in relation to PAYG credits at [172], observing 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”.

We are wholly unpersuaded by Mr Rivett’s suggestion that Schedule 10A is somehow not in conformity with EU law insofar as it imposes conditions by reference to monetary amounts. He suggested that the approach adopted in the Vouchers Directive could in some way be read back into the position prior to 2019. There is no authority to support that approach, and in any event, as Ms Mitrophanous pointed out, it is expressly stated that the provisions of the Voucher Directive “should apply only to vouchers issued after 31 December 2018 and are without prejudice to the validity of the legislation and interpretation previously adopted by the Member States” (Footnote: ¹³). Mr Rivett also sought to argue that the “EU law” principles applicable to voucher treatment needed to be established by reference to decisions such as MRL and Lebara, but again we consider that proposition to be unjustified and misconceived.

The appeal under Ground 4 is dismissed.

By way of Respondents’ Notice, HMRC sought permission to cross-appeal in relation to the ground discussed below. LMUK objected to permission being granted for this ground, on the basis that it was not an argument which had been raised before the FTT, and so could not be raised by way of Respondents’ Notice (Footnote: ¹⁴). We decided that in fact the argument was encompassed by certain amendments filed by HMRC to their Statement of Case before the FTT, but that to the extent that permission was required we would grant it.

In relation to Type 2 Bundles, to recap, the FTT decided that (1) these comprised a single composite supply, of which most of the VAS were merely ancillary elements, but (2) where a Type 2 Bundle included the non-EU roaming VAS, then, as with Type 3 Bundles, there would need to be an adjustment to the VAT arising on sale of a bundle before 1 November 2017 in respect of any “effective use and enjoyment” of data in a relevant non-EU country.

HMRC challenge the second of these conclusions.

The FTT set out its reasoning at [125]-[127]. Having concluded that most of the VAS in a Type 2 Bundle were merely ancillary elements in a single composite supply of telecommunications services, the FTT said this:

Ms Mitrophanous argued that the basic error made by the FTT was not to follow through the logic of its single composite supply analysis to the effective use and enjoyment provisions. The predominant element of a composite supply is relevant to all VAT issues, she said, including the place and rate of supply, and there was no basis on which the FTT could have concluded that an exception to this should arise for the effective use and enjoyment provisions.

Put another way, once an element of a single supply is identified as minor or ancillary, it can play no role in identifying any aspect of the VAT treatment.

Ms Mitrophanous’ proposition appears straightforward. However, it raises an obvious question. That is why HMRC do not also seek to challenge the FTT’s conclusion that the effective use and enjoyment rules apply for Type 3 Bundles supplied before 1 November 2017. The FTT’s conclusion in this respect was set out at [131]:

Ms Mitrophanous explained this by saying that there is no inconsistency because “in Type 3 Bundles there is no contention that any used element while outside the EU is from an ancillary/minor element of the supply” (Footnote: ¹⁵). However, this assumes that in relation to Plan 2 Bundles the FTT considered that non-EU calls would be made from the ancillary or minor element of the composite supply. This assumption is wrong, because the thrust of the FTT’s analysis at [125]-[126] (set out above) is that, notwithstanding the VAS label, usage of the non-EU calls VAS was precisely the same for a customer as usage of the Allowances (being the principal element of the composite supply), save that it was usage enjoyed from a location outside the UK.

That is presumably why Ms Mitrophanous’ challenge under this ground also explicitly challenges the FTT’s finding that it was the same service being used for both Allowances and non-EU roaming calls in Type 2 Bundles. Unless that challenge succeeds, there is no material basis of distinction between Type 2 and Type 3 Bundles in this respect.

We consider that the FTT was entitled to reach the conclusion it did that in Type 2 Bundles “to all intents and purposes, when the customer was using the non-EU Roaming Calls VAS, he or she was enjoying precisely the same service as when he or she was making use of the Allowances in the UK” ([126]). The FTT had all the evidence before it, and this was an inference which it was rationally able to make.

The consequence of this is that the FTT decision which is challenged by HMRC’s cross-appeal, properly understood, was not (as HMRC say) a decision that usage of a minor or ancillary element of a Plan 2 Bundle could fall within the effective use and enjoyment rules. Rather, it was a decision that in substance the relevant usage was of the same service as the predominant element (the Allowances) and so fell to be treated in the same way as for Type 3 Bundles.

We do not consider that the FTT erred in law in its conclusion regarding Type 2 Bundles, with the consequence that HMRC’s cross-appeal is dismissed.

LMUK’s appeal and HMRC’s cross-appeal are dismissed.