Telefonica Europe PLC v HMRC [2016] UKUT 173 (TCC)

Telefonica Europe PLC (trading as O2) issues a monthly 'network access charge' to EU customers in exchange for access to its network globally.  This case concerns 'pay as you go' (PAYG) customers of O2 who are not subscribed to an ongoing contract.  The customers on a PAYG arrangement pay a monthly fee which can be broken down into two parts:

1. A call bundle charge for an agreed number of calls.
2. A network access charge.

In addition to providing basic access to O2s EU network, the 'network access charge' allows O2 customers access to telephone networks in non-EU countries without extra charge.  However, any calls made on that international network will be charged for at additional 'roaming' rates.

Article 58 of the EUs Council Directive on the 'Common System of VAT' (EC 2006/112/EC) provides:

"In order to avoid double taxation or...distortion of competition, Member States may, with regard to the supply of the services [such as telecommunications]:

(a) consider the place of supply...of those services, if situated within their territory, as being situated outside the Community, if the effective use and enjoyment of the services takes place outside the Community" (Emphasis added)

The UK have exercised their right to utilise the above provision in law.¹

It is common ground that the network access charge is issued in the EU.  However, each month a proportion of O2 customers 'effectively use an enjoy' their network access outside of the EU.  The issue in the present case relates to an apportionment of that 'non taxable' proportion used outside the EU.

The Issue

The network access charge is inclusive of VAT.  Thus if an O2 customer makes all calls for a given month in the UK/EU then presumably 20% of the network access charge is payable to the HMRC/relevant tax authority (20% being the UK rate of VAT).  If however, only half of the calls made that month were made inside the EU and the other half were made outside the EU, then presumably only 10% of the network access charge would be inclusive of VAT thus O2 would remit that 10% to the HMRC/relevant tax authority and retain the rest of the fee.

The HMRC contend that the number of calls made by O2 customers outside the EU divided by the total number of calls made by O2 customers that month produces the correct apportionment of its 'network access charge' for VAT purposes in accordance with the EUs directive.²

O2 contend that its preferred proxy is the total price of calls made from outside the EU divided by its total income from all calls for that month.³  Roaming charges for international calls are significantly higher than the cost of calls made on O2s network inside the EU, thus the value of non-taxable calls under O2s method is significantly higher.  It was also contended by O2 that this method is considerably easier to perform (thus a realistic compliance proxy).  In any case O2 argued that its method was supported by EU law whereas the HMRCs wasn't.⁴

The Specifics

This case was actually referred to the Upper Tribunal to decide solely whether or not the HMRCs method was compliant with EU law.  All other matters will be decided in a later case (at the First Tier Tribunal).

For the present matter, the HMRC claim that the term 'use and enjoyment' refers to actual use and thus the correct method is one corresponding to actual use rather than total cost.⁵

O2 claim that VAT is a tax based on 'consideration' and thus the total cost of international of calls is necessary to take into account - which the HMRC doesn't and thus its approach is non-compliant with EU law.⁶

The Decision

"As we have agreed that “effective use and enjoyment” requires more than the mere right to access the network, it seems to us that use and enjoyment must be measured by reference to actual access.  The most accurate method of apportionment would be to use the time a customer has access to the telecommunications network outside the EU (ie time spent with a mobile phone with roaming switched on) in each monthly charging period.  As discussed above, it appears that it is necessary to use a proxy for such access, ie actual calls, texts or data made and sent or received."⁷ 

"It is clear that customers pay more to make calls, send texts or receive data when outside the EU but that does not, in our view, show that they value the ability to access the network outside the EU more highly than in the EU.  It seems to us that such a value is subjective and may depend on a number of factors other than the location of the customers when they wish to access the telecommunications network.  Telefonica charges its customers a monthly network access charge for the ability to access the network during the relevant month.  The network access charge remains the same whether the customer accesses the network in the UK or in a non-EU country (although there will be additional charges for calls, text and data outside the EU).  As Telefonica charges the same for access to the network in the EU and outside the EU, it is not possible, in our view, to say that customers placed a higher value on the nonEU network access services.  There is no evidence which suggests that the actual costs to Telefonica of providing access to networks outside the EU are correlated with the costs of providing the actual calls made by customers from outside the EU.  Although customers manifest their agreement to pay more for making calls from outside the EU by in fact making those calls under a tariff which charges them more, they have not manifested a similar agreement to pay more for network access from outside the EU because the monthly charge for access does not charge them more for that access."⁸

Notes

Case [2016] UKUT 173 (TCC):  http://www.bailii.org/uk/cases/UKUT/TCC/2016/173.html

1.  p8(3) of Schedule 4A to the Value Tax Act 1994 (note, this doesn't appear in the online version of legislation but all of my records suggest it still exists - seek further advice on this if required)
2.  p33  (of the case)
3.  p20
4.  p41
5.  p43
6.  p41
7.  p56
8.  p57

Legislation

Value Added Tax Act 1994
Council Directive 2006/112/EC