HM Revenue and Customs v Arachchige

JurisdictionEngland & Wales
Judgment Date08 November 2010
Neutral Citation[2010] EWCA Civ 1255
Docket NumberCase No: A3/2009/2079
CourtCourt of Appeal (Civil Division)
Date08 November 2010

[2010] EWCA Civ 1255





Mr Justice Lewison

Before Lord Justice Mummery

Lord Justice Etherton


Lord Justice Sullivan

Case No: A3/2009/2079


Prince Karunaraina Samarappuli Arachchige
The Commissioners for Her Majesty's Revenue and Customs

Mr David Southern and Miss Rebecca Murray (instructed by Bar Pro Bono Unit) for the Appellant

Mr Nigel Pleming QC, Mr George Peretz and Miss Fiona Banks (instructed by Customs & Excise (Manchester)) for the Respondent

Hearing dates: 14th October 2010




This case concerns the proper treatment for Value Added Tax (“VAT”) of the sale by a UK trader, such as a high street shop, of phone cards issued in another member state of the EU by a supplier of telecommunications services established there, and purchased and used in the UK by non-business customers to telephone someone in another member state of the EU using the telecommunications services of the issuer. The Appellant, Prince Karunaraina Samarappuli Arachchige, who runs such a shop, contends that such sales do not attract VAT. The Respondents, Her Majesty's Commissioners of Revenue and Customs, contend that they do.


The case turns on whether or not under UK legislation, notwithstanding the phone card is sold by the UK trader to a customer in the UK, the supply represented by the sale of the card is deemed to be in the EU member state of the entity providing the telecommunications service. This turns on the proper meaning and application of Article 21 the Value Added Tax (Place of Supply of Services) Order 1992/3121 (“the Place of Supply Order”) as it was worded prior to its amendment with effect from 1 August 2006. That amendment made it clear that, in respect of sales of phone cards after that date, the sale is a taxable supply in the UK.


The Appellant succeeded before the VAT Tribunal (Charles Hellier (chairman) and Mohammed H Hossain FCA, FCIB) (“the Tribunal”), whose decision was released on 4 June 2008. The Respondents successfully appealed to Lewison J, whose judgment was handed down on 20 May 2009. This is an appeal from his order of the same date.

Factual background


The following summary of the factual background is taken from the helpful summaries of Lewison J and the Tribunal.


During the relevant period the Appellant ran a shop at 192B West Hendon Broadway, London. Among the things that he sold in that shop were phone cards. He sold a variety of phone cards. Some provided cheaper calls to European destinations, others to Asian or African destinations. They were bought by people who had relatives or contacts in those areas. The phone cards generally bore face values of £3 or £5. They were sold for their face value or a slightly lesser amount. The Appellant bought each phone card for about 10p or 20p less than the amount for which he sold it. The vendors of the phone cards came to his shop every day. The Appellant would accept a batch of cards and the vendor would return at the end of the day to collect money equal to the agreed purchase price of the cards that he had sold.


In order to use a phone card he or she had purchased from the Appellant, the customer had to scrape off the covering of a PIN on the reverse of the card. The card also bore a phone number. The customer dialled that phone number followed by the PIN, and then the full number of the destination he or she wished to call. The call arrived at the receiver of the card phone number. At that location there was a piece of equipment called a 'switch'. The switch recorded the use of the card and redirected the call. The call was directed so that for the period of the call use would be made of telephone line capacity acquired or paid for by a person involved in the operation of the cards. The switch device was either owned by the issuer of the card (or rented by the issuer on a long term basis) or owned (or rented) by a sister company of the issuer. The issuer of the card did not own the line over which the call reached the switch (that was generally a BT line) or the line along which the call travelled to its final destination but would have acquired the right to use time on the lines on which the onward travel took place. All the switch devices for cards sold in the UK were located in the UK. Generally cards sold in the UK were for use by someone using a telephone in the UK and could not be used from outside the UK.


The Appellant was assessed for £43,289.00 VAT in respect in respect of his sales of phone cards from 1 May 2003 to 31 January 2005. He appealed against that assessment to the Tribunal on several grounds, one of which was that pursuant to Schedule 10A of the Value Added Tax Act 1994 (“ VATA 1994”) the supply of some of the phone cards should be disregarded for VAT purposes. He accepted that the supply of phone cards issued by a non-EU telecoms company for use in telephoning a non-EU country was subject to VAT. His objection was only to the assessment in respect of his supply of phone cards issued by a telecoms company in another EU member state.

The EU legislation


For the purpose of this appeal, it is necessary to refer only to the following EU legislation.


The EU provisions governing the place of supply were formerly in Article 9 of the Sixth Directive (Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the member states relating to turnover taxes), which has subsequently been recast in Articles 24, 44–48, 53–54 and 56–59 of the Principal VAT Directive (2006/112/EC) of 28 November 2006, with effect from 1 January 2010. The argument before the Tribunal, Lewison J and this court has been conducted on the provisions of Article 9 of the Sixth Directive, and so it is convenient to refer to those same provisions in this judgment. The relevant provisions of Article 9 are as follows

“(1) The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.

(2) However:

(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:

Telecommunications. Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception. Telecommunications services within the meaning of this provision shall also include provision of access to global information networks.

3. In order to avoid double taxation, non-taxation or the distortion of competition the Member States may, with regard to the supply of services referred to in 2 (e) and the hiring out of movable tangible property consider:

(a) the place of supply of services, which under this Article would be situated within the territory of the country, as being situated outside the Community where the effective use and enjoyment of the services take place outside the Community;

(b) the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country.”


This case is concerned with supplies by the Appellant within Article 9(1). Article 9(2) does not apply because his sales were not to business customers within Article 9(2)(e). Under Article 9(1) the supplies are, as the Respondents contend, in the UK where the Appellant's business is established.

The UK legislation


The UK's obligations under the Sixth Directive were transposed into domestic legislation by VATA 1994. By section 1 of VATA 1994 UK VAT is chargeable on the supply of goods or services in the UK.


Section 7 deals with the place of supply. Section 7(10) and (11) are the material provisions. They provide as follows:

“(10) A supply of services shall be treated as made—

(a) in the United Kingdom if the supplier belongs in the United Kingdom; and

(b) in another country (and not in the United Kingdom) if the supplier belongs in that other country.

(11) The Treasury may by order provide, in relation to goods or services generally or to particular goods or services specified in the order, for varying the rules for determining where a supply of goods or services is made.”


Section 7(10) (a) reflects and transposes into UK legislation the provisions of Article 9(1) of the Sixth Directive. The Appellant “belongs” in the UK within that provision because section 9(2) of VATA 1994 provides that a supplier of services is treated as belonging in a country if he has there a business establishment or some other fixed establishment and no such establishment elsewhere. The question is whether the application of section 7(10) of VATA 1994 to the Appellant, in respect of the supply of...

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