ECJ hands down judgment in VAT phone-card case, plus international cases update – April 2012

On Friday the European Court of Justice handed down its decision in Lebara (Taxation) [2012] EUECJ C-520/10. In this case the Court was asked to determine whether the supply of phone cards by Lebara to distributors who then on-sold those cards to customers involved a single supply of telecommunication services by Lebara or (as contended by the Revenue) the supply of two services by Lebara, being (i) the issue of the card and (ii) the redemption of the card by the end user.  The Court found that only a single supply of telecommunication services was made.

The facts can be simply stated.  Lebara sold phone cards to distributors for an agreed arise (being lower than the face value of the cards), the distributors then resold the cards at their face value (either under their own brand or even under the Lebara brand) – in any event, the distributors were acting in their own name and not as agents of Lebara.  The phone cards were activated by Lebara following a request by the distributor, provided that the distributor had paid for them.  Lebara did not know the identity of the user, but had systems in place which enabled it to track each card sold, whether the card was still valid, the amount of unused credit, the numbers called – the distributors did not have access to that system.

Lebara did not account for VAT on the sale of phone cards to distributors in the basis that the transaction was a supply of telecommunication services in the Member State in which the distributor was established and that, in consequence, it was the distributor which had to pay the VAT in that Member State in accordance with the reverse charge mechanism.  Lebara contended that the actual use of the card did not entail the supply by Lebara, for consideration, of services to the end user.  By contract, the Revenue contended that Lebara had to pay VAT in the UK because it supplied two services, (i) the issue of the card, which took place t the time the card was sold to the distributor, and (2) the redemption, when the card was actually used.  The UK taxes the second supply – the taxable value was contended to be the amount paid by the distributor to Lebara which represented the use actually made of the card by the end user as a proportion of the face value of the card.

In considering the issue, the Court referred to the following principles (most of which would also have application in Australia):

  • the principle of the common system of VAT is the application to goods and services of a general tax on consumption which is exactly proportional to the price of goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged;
  • VAT is intended to tax only the final consumer and to be completely neutral as regards the taxable persons involved in the production and distribution processes prior to the stage of final taxation, regardless of the number of transactions involved;
  • it is supplies of goods or services which are subject to VAT, rather than payments made by way of consideration for such supplies
  • the supply of services is effected “for” consideration only if there is a legal relationship between the service provider and the recipient, pursuant to which there is a reciprocal performance, the remuneration received by the service provider constituting the value actually given in return for the service supplied to the recipient

In finding that Lebara made a single supply of telecommunication services, the Court found that a supply of services is only taxable if it is made “for” consideration, which presupposes a reciprocity between the service provided and the remuneration constituting the value given in return for that service – Lebara only received a single actual payment in the course of supplying its telecommunication services. Further, that payment cannot be treated as a payment made to Lebara by the end user, even if the resale of the phone card by the distributor ultimately leads to the burden of making that payment being passed on to the end user.

From an Australian perspective, the case does appear unusual, particularly as it appears that the UK was trying to claim a second amount of VAT on what was a single payment.  As is often the case, the impetus for the case may well lie in the complexities of the European system and the UK feeling that it was missing out on VAT revenue (the phone cards were sold in other Member States).  In Australia, the issue would not appear to arise as the voucher provision in Division 100 of the GST Act would operate with the effect that no GST was payable on the redemption only, not on the issue of the cards.

International cases update 

In April 2012 the following decisions were handed down in New Zealand and the UK (including the ECJ) and Canada.

New Zealand

Court of Appeal

United Kingdom and ECJ

Upper Tax Tribunal

  • Brendan McMahon v HMRC [2012] UKUT 106 – VALUE ADDED TAX – evidence of export – whether First-tier Tribunal applied correct legal test – despite incorrect statement, yes – whether tribunal’s findings of fact supported by evidence – yes – appeal dismissed
  • Sally Moher at Premier Dental Agency v HMRC [2012] UKUTB2 – VALUE ADDED TAX – exemptions – appellant engaged dental nurses and supplied them as temporary staff to dentists – whether appellant made supplies of staff or of medical treatment – supplies of staff – supplies standard-rated – appeal dismissed

First Tier Tribunal

  • Collins (t/a Unique Vehicles) v Revenue & Customs [2012] UKFTT 220 – VAT – entitlement to credit for input tax on motor cars – article 7 of VAT (Input Tax) Order 1992 (SI 1992/3222) considered – whether intention to make car available for private use – intention to use car primarily for self-drive hire – evidence of entitlement to input tax where documents contradictory or missing – 2007 statement of practice on input tax deduction without valid invoice – jurisdiction of Tribunal to review HMRC’s exercise of discretion whether to accept alternative evidence of entitlement to input tax deduction – misdeclaration penalty – appeal allowed in part
  • The Trustees of The Eaton Mews Trust v Revenue & Customs [2012] UKFTT 249 – VALUE ADDED TAX — zero-rating — construction of building — VATA s 30(2), Sch 8 Group 5 — whether retention of party wall a condition of planning consent — yes — appeal allowed
  • Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251 – VALUE ADDED TAX- – MTIC-sale of mobile phones and CPUs – appellant’s repayment claim of £3,039,723.75 refused on grounds that the appellant knew or ought to have known that the transactions were part of an MTIC fraud -appellant knew that the deals were part of a VAT fraud –appeal dismissed – to see my post on this case, click here.

European Court of Justice

  • Able UK (VAT) [2012] EUECJ C-225/11 – Exemptions – Article 151(1)(c) – Supply of services of dismantling obsolete US Navy ships in the territory of a Member State
  • Balkan and Sea Properties (VAT) [2012] EUECJ C-621/10 – Sale of immovable property between connected companies – Value of the transaction – National legislation providing that for transactions between connected persons the taxable amount for VAT purposes is the open market value of the transaction


Supreme Court of Canada

  • Calgary (City) v Canada 2012 SCC 20 – Single supply or multiple supplies  ― City acquiring and constructing transit facilities ― City claiming and receiving public service body rebates for portion of GST paid ― City also claiming input tax credits in respect of GST paid on purchases made for transit facilities ― Whether acquisition and construction of transit facilities constituting an exempt supply, a taxable supply or both ― Whether “transit facilities services” a taxable supply to the Province separate from exempt supply of “public transit services” to public – to access my case summary click here

Tax Court of Canada

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