R (on the application of Telefonica Europe Plc and Another) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 April 2016 |
| Neutral Citation | [2016] UKUT 173 (TCC) |
| Date | 15 April 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mrs Justice Rose DBE, Judge Greg Sinfield
Sam Grodzinski QC, counsel, instructed by Herbert Smith Freehills LLP, solicitors, appeared for the Appellants
Jessica Simor QC and Eleni Mitrophanous, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Judicial review – Determining place of effective use and enjoyment of telecommunications services – Whether methodology for apportioning charge between EU and non-EU services based on usage is unlawful – Whether claimants had legitimate expectation derived from correspondence with HMRC that claimants could continue to use methodology based on revenues until change in law or claimant's business – Whether HMRC had duty to consult claimants before requiring them to apply a new methodology – Whether HMRC consulted claimants adequately.
The Upper Tribunal dismissed the Claimants' application for judicial review of a decision issued by HMRC on 26 November 2014 requiring the Claimants to change the way in which they calculated the proportion of the monthly charge to customers for network access used and enjoyed outside the EU.
This case concerned a judicial review challenge by Telefonica Europe plc and Telefonica UK Ltd (trading as O2) (together “Telefonica”) of HMRC's decision requiring them to completely change an approved methodology for calculating the charge to customers of using their network services outside of the EU. Between the years 2008 and 2014, Telefonica agreed with HMRC that they would calculate the said charge (and resulting VAT) as follows:
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1) Determine what proportion of the charges paid by the customer outside their fixed plan (“additional services”) in a month related to voice calls, messaging and data services outside the EU as compared to total charges paid by the same customer in that month for the time spent and number of messages sent. This was said to be because the additional services charges were calculated on a time spent/usage basis;
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2) Apply that proportion of the charges to the monthly line rental charge;
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3) Treat the amount so determined as not subject to VAT.
Telefonica referred to this method of calculation as “the Revenue Methodology”.
In late 2014, HMRC decided that the Revenue Methodology was distortive because customers paid significantly more for network services provided outside the EU than provided within the UK and the EU. This meant that the charges for non-EU services were a much higher proportion of the cost of the additional services as opposed to the volume of non-EU services compared with the overall volume of additional services.
HMRC expected Telefonica to change the Revenue Methodology (“the Decision”) and calculate the charges as follows:
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1) Calculate the proportion of the monthly line rental charge that related to non-EU services by reference to the usage of phone calls, messages and data services used by the customers whilst outside the EU;
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2) Use the above amount and calculate the proportion of the total use of those services.
The new method of calculation was known by the parties as “the Usage Methodology”.
Telefonica argued that the Decision was unlawful on three bases:
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1) The Usage Methodology was unlawful because it was contrary to EU and domestic VAT legislation;
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2) Since HMRC had given Telefonica a clear assurance in 2008 that the Revenue Methodology would continue to apply (subject to changes in the law or business model) and there was no change, the Decision was a breach of substantive legitimate expectation;
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3) Since Telefonica had not been afforded the opportunity in consultation to explain why the Usage Methodology was difficult to implement in practice, the Decision was a breach of procedural legitimate expectation.
In March 2008, Telefonica submitted a “voluntary disclosure” claim to HMRC for the recovery of £16,639,733 overpaid output tax. Telefonica claimed that their VAT returns submitted between January 2005 and December 2007 failed to take into account the fact that they were not required to account for VAT on the part of the network access charge outside the EU. In the disclosure, Telefonica stated that they had used the Revenue Methodology “to calculate the effective non EU use and enjoyment of the line rental services provided” i.e. “the non-EU network access charge”. Telefonica added that “this was the only practical method by which [they] have been able to calculate this VAT adjustment” as this was the method for which they had clearly auditable and reliable data.
Telefonica met with HMRC to explain the Revenue Methodology again and HMRC asked them to set out in writing why they would not be unjustly enriched if the claim succeeded. Telefonica set out its reasons in a letter of 2 May 2008. The reasons were essentially that Telefonica, and not their customers, had borne the cost of the overpayment as the fixed retail plan prices were all inclusive of VAT.
HMRC agreed to the voluntary disclosure claim and the Revenue Methodology used to calculate it on 29 May 2008.
Telefonica proposed to use the same method to calculate their prospective quarterly output VAT liability and set out a detailed step-by-step calculation in a letter dated 16 June 2008. HMRC's full approval was received on 4 August 2008. HMRC's approval was said to remain in place “unless it [became] necessary to make changes to the methodology due to changes in law or the business”.
In September 2010, Telefonica proposed certain adjustments to the Revenue Methodology's calculation of the revenues generated from additional services used outside the EU for 2009, the first two VAT accounting periods of 2010 and all future periods. HMRC appointed an internal auditor to review the proposals. Following a visit to Telefonica's offices by the new auditor, HMRC confirmed their acceptance of the adjustments.
The status quo remained virtually undisturbed until 20 February 2014 when HMRC and Telefonica's VAT team met to discuss a number of issues including the non-EU network access charge. HMRC now sought a revised methodology.
It became clear that not only Telefonica but other telecommunications companies objected to the change in methodology and as a result, on 26 November 2014, HMRC published a position paper which set out HMRC's view of the adjustment that needed to be made. In essence, HMRC proposed a calculation based on physical usage rather than value (“the Usage Methodology”). HMRC expected Telefonica (and others) to cease using the Revenue Methodology by 31 December 2014. Following a meeting in December 2014, a second paper by HMRC and a further meeting on 12 February 2015 which prompted a pre-action letter from Telefonica, HMRC acceded to an extension of time until 31 March 2015. This deadline was officially communicated in an updated position paper dated 25 March 2015.
In order to determine the first ground of challenge, the Upper Tribunal had to construe the terms of the Principal VAT Directive, art. 59a and VATA 1994, Sch. 4A, para. 8(3). The Tribunal discussed the purpose of the provisions as determining the place of supply and bearing in mind that purpose it concluded that:
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a) Neither the legislation on place of supply nor the phrase “use and enjoyment” in art. 59a required consideration of an economic use to the exclusion of other measures of use.
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b) The word “enjoyment” should not be given a separate meaning in the case of a service that is clearly used as in this case. The words “and enjoyment” do not require some concept of the value of the services to be imported into the consideration of where the services are supplied.
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c) The first step was to identify the supply, which in this case was the ability to access a telecommunications network in the UK and abroad. This did not include the supply of telecommunications (calls, texts or data).
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d) The second step was to determine what is meant by “effective use and enjoyment” of the ability to access the network. The Tribunal agreed with the undisputed view in HMRC's position paper that “effective” meant actual enjoyment of this ability: i.e. actually accessing the network.
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e) The final step was to consider how the monthly network access charge was to be apportioned between EU and non-EU locations where the service is used and enjoyed in more than one place.
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f) The most accurate method of apportionment would be to use the time a customer has access to the telecommunications network outside the EU in each monthly charging period. The tribunal accepted the parties' use of a proxy for such access in this case: actual calls, texts and data made and sent or received.
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g) There is nothing in the relevant provisions which precludes an approach of determining use and enjoyment based on actual usage.
Taking into account all of the above considerations, the Tribunal held that HMRC's Usage Methodology was not unlawful or contrary to the legislation construed properly.
The Tribunal approached this ground on the basis that the Usage Methodology was not unlawful and after a very detailed analysis of the relevant case law. The Tribunal held that reviewing the 4 August letter in its proper context and taking into account that there was no request for a ruling about future use of the Revenue Methodology for years to come, there could be no clear assurance from HMRC. The fact that the letter repeated Telefonica's phraseology that the Revenue Methodology would be applied to all VAT adjustments “unless it becomes necessary to make changes to the methodology due to changes in law or the business” did not amount to an unqualified assurance that the method could be used as long as there...
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