HMRC Wins Phone Card VAT Case

by Robin Pilgrim, LawAndTax-News.com, London

10 March 2006

The UK's Revenue and Customs (HMRC) has commented following a judgement in its favour by the Court of Appeal over the applicability of VAT to cross-border phone card distribution.

IDT Card Services Ireland Limited (IDT) had sought to reduce (to nil) the amount of VAT payable to HMRC by its UK distributors of phone cards. The scheme involves phone cards issued from Ireland, and also aims to avoid payment of any VAT when the cards are issued in Ireland and redeemed for telecommunications services.

The Court of Appeal supported HMRC's view that when phone cards are supplied to a UK distributor by an issuer in another Member State operating a scheme such as IDT's, UK VAT is due from the UK distributors on their onward sale.

HMRC do not accept that there are any circumstances in which telecommunications services consumed within the EU can be VAT free, which would have been the effect of IDT's scheme, and the Court of Appeal agreed with HMRC.

HMRC had announced that, pending the outcome of the Court of Appeal hearing, no further assessments would be issued to UK businesses for VAT on phone cards supplied under schemes such as the one operated by IDT, although the agency said it would issue assessments to protect its position where assessment time limits might otherwise be exceeded, but no action would be taken to recover the debt unless the appeal were resolved in HMRC's favour.

Says HMRC: 'Although the appeal has now been resolved in HMRC's favour by the Court of Appeal, we will not enforce any existing assessments unless and until it is clear that the House of Lords will not consider an appeal or the litigation is otherwise concluded. In the meantime, over the course of the next few months we will identify, as
necessary, the distributors of both IDT's phone cards and other phone cards sold under similar arrangements, and begin to carry out visits to quantify the necessary assessments, so as not to miss any time limits.

'If HMRC are ultimately successful in this litigation, businesses will be required to pay assessments issued but not enforced, or make a voluntary disclosure of underdeclared VAT and pay any VAT that is due together with any related interest. Businesses may prefer to make voluntary disclosures and pay the VAT and interest immediately, pending the outcome of the litigation, as this will restrict the amount of interest charged.'

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