Mobile phone operators limber up for Customs court battle

HM Customs & Excise faces potential embarrassment should mobile phone operators win a case scheduled to be heard by the VAT Tribunal later this year. The tribunal will look at how Customs handled the VAT liabilities incurred by mobile phone operators when they bid for the third-generation (3G) phone licences.

Some industry experts say Customs made a huge blunder by not tagging 15 per cent VAT on top of the £22.5bn paid by the operators to get their licences. Had it done so, it would have interpreted accurately European indirect tax legislation, claim the experts.

Now the operators have come forward and said they want a rebate from the £22.5bn. Customs maintains that the operators were never VAT liable, hence there is nothing to return.

The outcome could leave Customs out of pocket by as much as £3.35bn, the value of the operators’ rebate claim.

The English VAT Tribunal, based in Bedford Square, will decide whether to rule or refer the matter straight to the European Court of Justice (ECJ). The case has a strong European angle, as it rests largely on the interpretation of Article 4 of the EU’s sixth directive. It seems most likely that the tribunal will want to have its say and then let the ECJ handle the appeals. This case is one of several similar claims being fought between operators and governments.

This is bad news for those seeking a swift decision. The ECJ is fast becoming Europe’s equivalent of the Indian courts, where justice moves at a snail’s pace. More often than not, they get stuck in a quagmire of cases competing to be heard, with struggling translation services (cases have to be translated into the languages of all member states) and large judging panels seeking unanimity in their conclusions.

However, a long wait takes the pressure off Customs, which is already reeling from recent bad publicity. In December the Attorney-General Lord Goldsmith replaced Customs’ prosecuting body with a new independent one because of blunders by Customs in relation to its investigations into alleged tax evasion by bonded warehouses.

The operators in the English case – mmO2, France Telecom’s Orange, Deutsche Telecom’s T-Mobile, 3 (majority-owned by Hutchison Whampoa) and Vodafone – claim the billions they unenthusiastically shelled out to receive their 3G mobile phone licences included VAT worth 15 per cent.

They say this VAT payment is implicit in Article 4, which states that EU governments “shall be considered taxable persons in relation to activities listed in Annex D” of the article. The list includes telecommunications.

Therefore, in the same way as a company that pays VAT can later reclaim it, so the phone operators are claiming that they can do the same.

The UK Government’s counter argument also looks to Article 4. It claims it did not need to impose VAT on the operators and therefore is not liable for any rebate. This is based partly on the interpretation of whether, in giving licences to the operators, it was actively engaged in telecommunications activity. If so, then it should have imposed VAT; but if the parameters of its function was as a provider of a licence, then it should not have imposed VAT and thus the operators are not owed a rebate.

Lovells tax partner Greg Sinfield says this is equivalent to asking whether an authority that issues fishing licences is involved in the act of fishing. He concludes: “The Government was not carrying out a telecommunications activity, but simply authorised the mobile phone operators to provide telecoms services subject to certain conditions, which is a regulatory activity.”

To confuse matters further, another argument, loosely associated with competition law, is likely to be thrown into the fire.

This asks whether the Government, when it issued the 3G licences, was acting as an “economic” entity or a state entity. EU law states that if a minister acts on an economic basis, then VAT should be levied.

Both arguments are valid, but observers say Customs could have avoided the whole furore by accepting at the time of the 3G licence
bid the operators’ current argument that VAT is owed and tagging that on to the £22.5bn.

If it had done so, Customs could now just do a bit of paper shuffling and hand the VAT back to the mobile operators.

As things stand, it faces the prospect of paying back 15 per cent of the £22.5bn it received in licence payments, which at the time it did not think included VAT. The loser, of course, is the UK taxpayer.

It looks set to be quite a battle. The case has inaccurately been compared with a group litigation order. These relate to a single party fighting a case that applies to others with matching claims.

In this case, all parties will go to court, with the operators’ claims split between Freshfields Bruckhaus Deringer and Linklaters.
Customs has so far not instructed external lawyers, and is using Monckton Chambers’ Kenneth Parker QC as lead counsel. Parker’s co-head of Monckton, Paul Lasok QC, has been instructed by Linklaters litigation partner John Turnbull for the operators. Essex Court’s VAT doyen Roderick Cordara QC has been instructed by Freshfields partner Paul Lomas, also for the operators.

Only Deutsche Telecom and 3’s claims against Austria have been referred to the ECJ. This still leaves claims in Germany and Italy as well as England. The likelihood is that the whole lot will be dumped on the ECJ, either through referrals from the domestic courts or on appeals, lining lawyers’ pockets for years to come.