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Lebara Ltd: VAT treatment of the sale of phone cards, ECJ makes significant decision

Wednesday, May 16, 2012

by Nick Ryan

The European Court of Justice (ECJ) has issued its judgment in the long awaited Lebara phone cards VAT case which provides for good news for both Lebara and other mobile operators. The decision follows on from a lengthy dispute with HMRC and, after referral by the VAT tribunal in the UK to the ECJ.

The basis of the issue under contention was the VAT treatment Lebara applied to the sale of its phone cards to distributors established in other EU Member States. The phone card provided the end user with the facility to make international calls by using Lebara’s infrastructure in the UK. These end users would purchase the cards from the distributor located in their local EC territory.

HMRC had disagreed with Lebara VAT treatment of the supplies of the cards to the distributors whereby Lebara claimed that it was supplying the distributors with a right to receive telecommunications services. Also, in consideration to the VAT rules that determine where the taxation should take place, the distributor, in Lebara’s opinion was obliged to account for the VAT on the transaction in its own country under a mechanism referred to as the ‘reverse charge’. Lebara also contested that the sale of the card by the distributor to the end user was a distinct and separate transaction with the distributor acting as principal and thereby accounting for VAT on the sale in their EU Member State.

HMRC disagreed with this treatment contesting that there were two elements to the sale of the phone card by Lebara, the sale of the card to the distributor and the access to use their infrastructure to the end user. The latter in HMRC’s view was a UK supply and therefore subject to UK VAT.

The ECJ pronounced in favour of Lebara stating that the marketing and pricing of the phone cards meant that there was no direct link and, therefore, no legal relationship between Lebara and the end user. As such, Lebara was not supplying two services in return for the consideration that was received. It was supplying the distributors who, in their own right, were supplying the end user.

The stance taken to date by HMRC on these arrangements has been questioned as it appears to suggest that a supply can be taxable in more than one State. It is hoped that this decision has provided the clarity needed in order for the application of the VAT rules to be made without further fear of challenge and thereby provide for the consistency needed.

For more information on this decision or on other VAT matters then please contact Nick Ryan at the VAT Practice. Alternatively leave your comment below.