UK Customs Likely To Challenge Vodafone's Use Of VAT Loophole

by Robert Lee, Tax-News.com, London

02 April 2004

Reports this week have indicated that Customs & Excise may be preparing to contest the way in which the world’s largest mobile phone network, Vodafone, is using a tax loophole to reduce the amount of VAT it pays, in a case that could be worth billions of pounds in revenue to the government.

According to the Financial Times, the scheme is similar to one whereby a firm establishes an Irish subsidiary to which it may then sell airtime hours in its British network at a large discount. The subsidiary will then convert this airtime into thousands of low-value phone cards which are then sold to another subsidiary in the UK, which in turn sells the cards to the public.

By entering into such an arrangement, the UK parent firm hopes to show that the supply of airtime is made by the Irish subsidiary, and that therefore the transaction is not liable for VAT.

The FT reports that the Vodafone arrangement is a more complex variant of this, and exploits a loophole where VAT is paid by the eventual redeemer of a voucher.

This is made possible by legislation left on the statute book after the 2003 Finance Bill was passed so that not-for-profit organisations could supply vouchers to retail outlets for a token fee to cover costs. The retail outlets then sell the vouchers on without having to account for the VAT.

Vodafone is arguing that it does not owe any VAT on such transactions, as the redeemer is based in Ireland. However, Customs & Excise is likely to challenge this assertion in the law courts, in a case that could drag on for some years.

It has been reported that some £500 million in tax revenue is already at stake for the government, and a successful outcome could eventually be worth billions in revenues.

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