Everything Everywhere has lost a legal battle to reclaim £4m of VAT payments after the European Court of Justice ruled in favour of HM Revenue & Customs.
The case was originally brought to court by T-Mobile in 2006 after HM Revenue & Customs refused to repay the operator £4m in VAT payments. The telecoms company had claimed that its additional charge of £3 to mobile phone customers who did not settle their accounts by either direct debit or by BACS should not be subject to VAT.
However, the European Court of Justice disagreed, ruling that the £3 charge is not for a separate ‘payment handling service’ but is instead simply an additional charge for the principle supply of mobile phone services.
Tax experts said this ruling will have wide implications for other businesses whose charges to customers are determined by the method of payment.
Karen Robb, head of London VAT at Grant Thornton said: ‘Everything, Everywhere had argued that the extra charge to customers was a payment handling service and as such should be exempt from VAT as a financial service.
'This was based on the fact that the service was charged for separately on the customer’s bill and was set out in the company’s terms and conditions with the customer.
'The Court took the view despite this separate charge, that there was no separate supply of payment handling services to the customer.’
As a result, the additional payment has to be regarded as part of the main price of the telecoms services and be subject to VAT at the standard rate.
Robb added: 'The cost to Everything Everywhere will be significant. The VAT payment in question was £4m for the two years ending July 2005.’
Rob said the implications are wide ranging. 'Any businesses that make additional charges to customers who do not make payment by specified means such as direct debit or BACS, for example utility companies, need to urgently review their VAT position.
'This is a significant victory for the VAT man and I expect that HM Revenue & Customs will pursue the implications of this decision with some vigour.’
In a statement Everything Everywhere said: 'Further to the recent ruling from European Court of Justice, Everything Everywhere is reviewing the decision and considering its options. As all VAT has been paid when it was due, there is no additional VAT to be paid as a result of this decision.'