This case concerns the way Telefonica calculated the element of its network access charge (line rental) that was used and enjoyed outside the EU and therefore outside the scope of UK VAT. In 2008 HMRC accepted a calculation that was called the ‘Revenue Methodology’ and paid Telefonica a three year back claim calculated using that method. This method calculated non-EU use and enjoyment by looking at what proportion of any additional services charges (services not included in the fixed monthly charge) in a month related to services used outside the EU and then applied that proportion to the network access charge to calculate the element of that access charge that was not subject to UK VAT. At the time the technology to identify a split based on usage was not available
HMRC decided that the Revenue Method was distortive. Discussions begun in 2013 when HMRC considered sufficient data was now held to allow for direct measurement of use. HMRC therefore decided in November 2014 that Telefonica and the other companies should apply a ‘Usage Methodology’ by 31 December 2014 (later delayed to 31 March 2015). This would calculate the non-EU network access charge by looking at time spent on calls, numbers of texts and volume of data used outside the EU as a proportion of total use. This was a more complex calculation and substantially reduced the VAT free revenue. Telefonica challenged the decision on three grounds:
The Usage Methodology was unlawful – the Upper Tribunal (UT) decided that Telefonica had not established the Usage Method was unlawful. There was nothing in the wording of purpose of either the UK or EU law that prohibited it. Effective use and enjoyment of the network should be measured by actual access, not merely the right to access. The most accurate method would therefore be to use the time a customer spent outside the EU in a charging period with a mobile phone that had roaming switched on. Actual calls, texts or data made, sent or received in the period was a proxy for measuring such access. Customers did not pay any more for network access when outside the EU – the access charge was the same each month and they only paid more for the additional services when they were outside the EU. This conclusion by the UT did not however mean that the Revenue Method was unlawful. It only meant that the Usage Method was not unlawful and was the appropriate method for calculating the extent of non EU use and enjoyment of network access.
Legitimate expectation - The UT then considered whether Telefonica had a legitimate expectation that it could continue to use the Revenue Method. The UT did not consider HMRC had given a clear or unambiguous assurance to that effect given the correspondence between the parties. No reasonable person would conclude that HMRC had given an open ended assurance that it had not been specifically requested to give. HMRC had also been given no reason as to why such an assurance was needed.
Adequate consultation - the UT considered HMRC had a duty to consult about the proposed change as it resulted in the loss of a substantial VAT benefit (additional retained income) for Telefonica. As laid out in the UT’s decision, it decided that HMRC had consulted and had done so properly over a period that had started in 2013. The claim by Telefonica was therefore dismissed.