Virgin Media Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 September 2018 |
| Neutral Citation | [2018] UKFTT 556 (TC) |
| Date | 25 September 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0556 (TC)
Judge Harriet Morgan
Mr David Scorey QC and Mr Edward Brown, instructed by KPMG LLP, as counsel appeared for the appellant
Mr Kieron Beale QC and Mr Andrew Macnab, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
Value added tax – Meaning of VATA 1994, Sch. 6, para. 4(1) as in force prior to 1 May 2014 – Whether supplies of fixed line services were made on terms allowing a discount for prompt payment within para. 4(1) – Whether para. 4(1) applies to reduce the consideration on which VAT is due where the discounted amount is not paid – Appeal dismissed.
The First-tier Tribunal (FTT) considered whether Virgin Media customers who paid for home broadband and telephone services annually received a prompt payment discount.
Virgin Media Ltd (“VML”) supplies consumers with home broadband and telephone services. Most customers paid for their services by a fixed monthly fee, but a “saver price” was available whereby customers could pay for 12 months of service in one annual fee. The annual fee was less than 12 times the standard monthly fee.
Before 1 May 2014, VATA 1994, Sch. 6, para. 4(1) included a provision that, if a supplier offered a discount for prompt payment, VAT was due on the discounted amount – whether or not the discount was achieved through prompt payment. With effect from 1 May 2014 the law was amended such that for telecoms services VAT was due on the actual consideration received. With effect from 1 May 2015 this treatment applied to all categories of supply.
VML argued that the saver rate represented a prompt payment discount on the grounds that if they paid for 12 months service in advance customers paid a reduced price. VML therefore accounted for VAT on payments from customers using the monthly plan by applying a discount to the amount received. HMRC disagreed with this approach and issued an assessment based upon the entire monthly fee being subject to VAT.
Both VML and HMRC put forward detailed and complex arguments regarding the proper construction of para. 4(1) and the proper way to interpret the contract between VML and its consumers.
Ultimately the FTT determined that the “saver price” did not amount to a prompt payment discount. Customers who paid the saver price were entitled to receive 12 months of services from VML, whereas customers who paid on the monthly plan were entitled to receive one months' service per payment. Customers on the monthly plan were able to terminate their contract at any point by giving notice and, depending on their plan terms, paying an early termination fee. These differences in contractual entitlement were sufficient for the FTT to determine that the customers received a different service depending upon the was payment was made. Thus, the upfront “saver price” did not amount to a prompt payment discount for paying 12 monthly plan fees early. As a result, VML should have accounted for VAT on the total consideration received from its customers and the appeal was dismissed.
HMRC issued an assessment for over £63m plus interest. The sheer size of the assessment suggests that VML are likely to appeal this decision, although (noted at para. 4 of the decision) VML disputes the quantum of the assessment. The parties agreed to address quantum after the liability issue was settled.
The law on the VAT treatment of prompt payment discounts was amended over four years ago and therefore the detailed arguments applied in this appeal are unlikely to be of significant wider interest. It will however be of interest to any business still in dispute with HMRC regarding prompt payment discounts. Disputes with HMRC can take a long time to resolve, in this case the assessments in question were issued in 2015 and it has taken nearly three years to reach the point where an FTT decision has been published.
[1] The dispute relates to the correct VAT treatment of supplies made by Virgin Media Limited (“VML”) to its domestic customers of providing a connection to the telecommunications network through a fixed line fibre optic cable and related telephony services (the “FLR services”) in the period from 28 August 2012 to 30 April 2014 (the “relevant period”). In outline, VML provided the FLR services to around 95% of its customers (the “monthly customers”) on a monthly basis in return for a monthly sum (the “monthly basis”). The remaining 5% of customers (the “saver customers”) chose to pay for 12 months of FLR services in return for a single sum (the “saver price”) of a lesser amount than would have been due if the customer paid on a monthly basis over the same period (the “saver basis”).
[2] VML's stance is that it is liable to account for VAT on the supplies of FLR services it made during the relevant period, including those made to the monthly customers, by reference only to the saver price. VML, therefore, accounted for VAT on the supplies it made to monthly customers, broadly, as though they paid one twelfth of the saver price each month rather than the higher monthly amount they in fact paid.
[3] In VML's view the supplies fall within the terms of para 4(1) of Schedule 6 to the Value Added Tax Act 1994 (“para 4(1)” and “VATA”), as that para applied during the relevant period. Under this provision the amount of consideration on which VAT is due (under s 19 VATA) is reduced where “goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment” (a discount for prompt payment is referred to as a “PPD”). In that case, the consideration is taken for the purposes of s 19 VATA, “as reduced by the discount, whether or not payment is made in accordance with those terms”. (I refer to para 4(1) in the present tense for convenience but all references in this decision to that provision and to other relevant VAT provisions are to those provisions as in force during the relevant period (except where expressly stated otherwise)).
[4] HMRC notified VML in a letter of 4 December 2015 that, in their view, VML was not entitled to account for VAT on supplies of FLR services to monthly customers in this way and issued VML with assessments for (a) £63,661,434 of undeclared output VAT due on VML's FLR supplies for the relevant periods (under s 73(2) VATA) and (b) interest on the amount of the VAT assessment in the sum of £3,333,588.08, (under s 76 VATA). VML disputed liability for both assessments and the quantum of the interest assessment. The parties agreed that this hearing should address liability issues only. It is not disputed that VML is liable to account for VAT due on supplies of FLR services by reference to the saver price where the saver price was in fact paid albeit that HMRC arrives at that conclusion on a different analysis to that adopted by VML.
[5] VAT is due on the supply of goods or services made in the United Kingdom (including anything treated as such a supply). It is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply (under s 1 VATA) on the value of the supply as determined under VATA (under s 2 VATA). Generally a business has to account for VAT in respect of all supplies which are regarded as taking place in an accounting period (which is usually a quarterly period), as determined under the time of supply rules, within a specified time of the end that period. In outline a “supply” for the purposes of VATA “includes all forms of supply, but not anything done otherwise than for a consideration” and “anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services” (under s 5 VATA).
[6] Where a supply is for a consideration in money its value, on which VAT is charged, is taken to be “such amount as with the addition of the VAT chargeable, is equal to the consideration” (s 19 VATA). This is subject to Schedule 6 VATA, including para 4(1), which at the relevant time provided that:
(1) Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.
(2) This paragraph does not apply where the terms include any provision for payment by instalments.
[7] Paragraph 4 was amended with effect from 1 May 2014 so that, as is not disputed, it is now beyond doubt that VAT is due only on the actual sums received for a supply made on a discounted basis.
[8] As a matter of European law, articles 73 and 79 of the Principal VAT Directive 2006/112/EC (“PVD”) contain provisions determining the taxable amount for VAT purposes as follows:
In respect of the supply of goods or services, other than as referred to in articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.
…
The taxable amount shall not include the following factors:
- price reductions by way of discount for early payment;
- price discounts and rebates granted to the customer and obtained by him at the time of the supply;
- amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.
The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged.
[9] The applicable time of...
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