The Queen on the Application of Telefonica Europe Plc and Telefonica UK Limited v The Commissioners for HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judge | Mrs Justice Rose,Judge Sinfield |
| Neutral Citation | [2016] UKUT 0173 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Date | 15 April 2016 |
| Subject Matter | Tax,15 April 2016 |
| Published date | 01 December 2016 |
[2016] UKUT 0173 (TCC)
Case number UTJR/2015/003
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
IN THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
IN THE MATTER OF AN APPLICATION FOR JUDICIAL REVIEW
BETWEEN
THE QUEEN
on the application of
TELEFONICA EUROPE PLC (1)
TELEFONICA UK LIMITED (2) Claimants
- and –
THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS Defendants
Tribunal:
The Hon Mrs Justice Rose DBE
Judge Greg Sinfield
Sitting in public at the Royal Courts of Justice, The Rolls Building, Fetter Lane,
London EC4 between 18 and 20 January 2016
Sam Grodzinski QC, counsel, instructed by Herbert Smith Freehills LLP,
solicitors, for the Appellants
Jessica Simor QC and Eleni Mitrophanous, counsel, instructed by the General
Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2016
2
DECISION
Introduction
1. Paragraph 8 of Schedule 4A to the VAT Act 1994 (‘VATA94’) provides that
where a supply of telecommunications services would otherwise be regarded as made
in the UK but the services are “effectively used and enjoyed” in a non-EU country
then the supply is treated as made in the non-EU country and thus not chargeable to
UK VAT. The Claimants (together, ‘Telefonica’) challenge a decision of the
Defendants (‘HMRC’) issued on 26 November 2014 (‘the Decision’) that Telefonica
must change the way it calculated the proportion of the monthly charge to customers
for the supply of access to the mobile telephone network (‘the network access charge’,
sometimes also referred to as ‘line rental’) that related to such access used and
enjoyed by customers outside the EU (‘the non-EU access’).
2. Between 2008 and 2014, Telefonica, with the agreement of HMRC, calculated the
value of the non-EU access by reference to the charges made for voice calls,
messaging and data services not included in the customers’ fixed monthly charge
(‘additional services’). In summary, Telefonica first determined what proportion of
the charges paid by the customer for additional services in a month related to
additional services used in non-EU countries as compared with total charges paid by
that customer in that month for the time spent and number of texts sent, since charges
for additional services are calculated on the basis of time spent and texts used.
Telefonica then applied that proportion to the network access charge and treated the
amount so determined as not subject to VAT. Telefonica referred to that method of
calculation as the ‘Revenue Methodology’. In November 2014, HMRC formed the
view that the Revenue Methodology was distortive because customers on the relevant
tariffs pay more for non-EU additional services than for additional services in the UK
and EU. This difference in the tariff for EU and non-EU additional services meant
that the charges for non-EU additional services were a much higher proportion of total
cost of additional services than the volume of non-EU additional services compared
with the overall volume of additional services. HMRC stated that Telefonica should
calculate the proportion of the monthly network access charge that relates to non-EU
access by reference to actual usage of the supply such as time spent on calls, numbers
of texts and volumes of data used by customers outside the EU as a proportion of the
total use of such services. This method of calculating the amount of the monthly
network access charge that relates to the non-EU access is referred to as the ‘Usage
Methodology’. The Usage Methodology would result in a significantly smaller
proportion of the monthly network access charge being treated as relating to services
used and enjoyed outside the EU and therefore not subject to VAT.
3. Telefonica challenges the Decision, by way of judicial review, on three grounds,
namely that:
(1) the Usage Methodology that HMRC required Telefonica to use is
unlawful because it is contrary to EU and domestic VAT legislation;
(2) the Decision constituted a breach of Telefonica’s substantive legitimate
expectation, based on a clear assurance given by HMRC in 2008, that it
3
could continue using the Revenue Methodology until there was a material
change in the law or in Telefonica’s business, which there has not been;
and
(3) it was taken without adequate consultation to enable Telefonica to
explain to HMRC the fundamental difficulties inherent in the adoption of
the Usage Methodology which was a breach of Telefonica’s procedural
legitimate expectation.
4. Telefonica’s claim was commenced in the Administrative Court in February 2015.
Nugee J granted permission on the papers on 11 May 2015 on the second and third
grounds described above but refused permission in relation to the first ground. There
was then a hearing before Ouseley J on 23 July at which permission was also granted
for Telefonica to argue the first ground. Recognising the specialist nature of the
issues, Ouseley J transferred the judicial review proceedings to the Upper Tribunal,
pursuant to section 31A Supreme Court Act 1981 (as inserted by section 19 of the
Tribunals, Courts and Enforcement Act 2007).
5. In contesting the grant of permission, HMRC argued, amongst other things that
some of the judicial review grounds raised issues of fact which should be dealt with
by Telefonica appealing to the First-tier Tribunal (Tax Chamber) (‘the FTT’) against
any future VAT assessment calculated by HMRC on the basis of the Usage
Methodology. HMRC accepted that the two legitimate expectation grounds could not
be resolved by the FTT and could only be considered by way of judicial review. As
regards the first ground, however, Telefonica contended that since the ground alleged
that the Usage Methodology was unlawful and not merely inappropriate, it raised
narrow issues of statutory construction and required no factual investigation. It was
therefore convenient they argued to consider that at the same time as the second and
third grounds were considered. There had initially been two other grounds of
challenge included in Telefonica’s application for permission, but after Nugee J
refused permission for those on the papers, Telefonica accepted that those were
matters that should be dealt with by the FTT, if and when Telefonica appealed against
a VAT assessment.
6. In his order dated 24 July 2015, Ouseley J
(1) granted permission to appeal on ground 1;
(2) transferred the claim to the Upper Tribunal; and
(3) directed that in the event that ground 1 does not succeed, the second
and third grounds should be determined on the assumption that the Usage
Methodology “is the appropriate methodology for calculating the relevant
VAT adjustment”.
The implications of the wording of Ouseley J’s order were the subject of submissions
before us which are discussed below. It is enough to say at this point that the order
circumscribes the scope of the issues before us.
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