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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> HM Revenue & Customs v Prince Karunaraina Samarappulli Arachchige [2009] EWHC 1077 (Ch) (20 May 2009) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2009/1077.html Cite as: [2009] BVC 475, [2009] 3 CMLR 24, [2009] STC 1729, [2009] BTC 5476, [2009] STI 1790, [2009] EWHC 1077 (Ch) |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
HER MAJESTY'S REVENUE AND CUSTOMS |
Appellants |
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- and - |
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PRINCE KARUNARAINA SAMARAPPULLI ARACHCHIGE |
Respondent |
____________________
Mr David Southern (instructed by Bar Pro Bono Unit) for the Respondent
Hearing dates: 28th April 2009
____________________
VERSION
OF JUDGMENT
Crown Copyright ©
Mr. Justice Lewison:
"action should be taken to ensure, in particular, that telecommunications services used by customers established in the Community are taxed in the Community."
"1. The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.
2. However:
…
(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:
…
Telecommunications. Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagneticsystems,
including the related transfer or assignment of the right to use capacity for such transmission, emission or reception. Telecommunications services within the meaning of this provision shall also include provision of access to global information networks.
…
3. In order to avoid double taxation, non-taxation or the distortion of competition the Member States may, with regard to the supply of services referred to in 2 (e) and the hiring out of movable tangible property consider:
(a) the place of supply of services, which under this Article would be situated within the territory of the country, as being situated outside the Community where the effective use and enjoyment of the services take place outside the Community;
(b) the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country.
4. In the case of telecommunications services referred to in paragraph 2(e) supplied by a taxable person established outside the Community to non-taxable persons established inside the Community, Member States shall make use of paragraph 3(b)."
"A supply of services shall be treated as made—
(a) in the United Kingdom if the supplier belongs in the United Kingdom; and
(b) in another country (and not in the United Kingdom) if the supplier belongs in that other country."
"The issue of a face-value
![]()
voucher,
or any subsequent supply of it, is a supply of services for the purposes of this Act."
"(1) This paragraph applies to a face-value
![]()
voucher
issued by a person who—
(a) is not a person from whom goods or services may be obtained by the use of thevoucher,
and
(b) undertakes to give complete or partial reimbursement to any such person from whom goods or services are so obtained.
Such avoucher
is referred to in this Schedule as a "credit
voucher".
![]()
(2) The consideration for any supply of a creditvoucher
shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face
value
of the
voucher.
(3) Sub-paragraph (2) above does not apply if any of the persons from whom goods or services are obtained by the use of thevoucher
fails to account for any of the
VAT
due on the supply of those goods or services to the person using the
voucher
to obtain them."
"(1) This paragraph applies to a face-value
![]()
voucher
issued by a person who—
(a) is a person from whom goods or services may be obtained by the use of thevoucher,
and
(b) if there are other such persons, undertakes to give complete or partial reimbursement to those from whom goods or services are so obtained.
Such avoucher
is referred to in this Schedule as a "retailer
voucher".
(2) The consideration for the issue of a retailervoucher
shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face
value
of the
voucher.
(3) Sub-paragraph (2) above does not apply if—
(a) thevoucher
is used to obtain goods or services from a person other than the issuer, and
(b) that person fails to account for any of theVAT
due on the supply of those goods or services to the person using the
voucher
to obtain them.
(4) Any supply of a retailervoucher
subsequent to the issue of it shall be treated in the same way as the supply of a
voucher
to which paragraph 6 below applies."
"(1) This paragraph applies to a face-value
![]()
voucher
that is not a credit
voucher,
a retailer
voucher
or a postage stamp.
(2) A supply of such avoucher
is chargeable at the rate in force under section 2(1) (standard rate) except where sub-paragraph (3), (4) or (5) below applies.
(3) Where thevoucher
is one that can only be used to obtain goods or services in one particular non-standard rate category, the supply of the
voucher
falls in that category.
(4) Where thevoucher
is used to obtain goods or services all of which fall in one particular non-standard rate category, the supply of the
voucher
falls in that category.
(5) Where thevoucher
is used to obtain goods or services in a number of different rate categories—
(a) the supply of thevoucher
shall be treated as that many different supplies, each falling in the category in question, and
(b) thevalue
of each of those supplies shall be determined on a just and reasonable basis."
i) Whether avoucher
is a credit
voucher
or a retailer
voucher
depends on who issues it. It does not depend on who supplies it to the end-user. Thus although Mr Arachchige did not himself issue any
vouchers,
some of the
vouchers
that he supplied to his customers were credit
vouchers
and others were retailer
vouchers.
![]()
ii) The touchstone for deciding whether a
voucher
is a credit
voucher
or a retailer
voucher
is whether the issuer can himself supply the goods or services to which the
voucher
relates. In some cases this will be obvious. For example a gift token issued by a department store redeemable only at that store will plainly be a retailer
voucher.
A gift token issued by a retailer (e.g. a garden centre) and redeemable either at that garden centre or another garden centre will likewise be a retailer
voucher.
Other forms of
voucher
are less obvious. In the case of a book token, for instance, although most people buy them in bookshops, they are not in fact issued by bookshops. They are, therefore, credit
vouchers.
And in the case of something like a phone card, it will be
very
difficult for someone in the position of Mr Arachchige to know whether any particular phone card is a credit
voucher
or a retailer
voucher.
He might have to undertake an investigation into the services that the issuer of the
voucher
is able to provide. This matters because of the different tax treatment of the two kinds of
voucher.
![]()
iii) If a
voucher
is a credit
voucher,
then the consideration for the
voucher
is disregarded (except to the extent that it exceeds the face
value),
both on the issue of the
voucher
and on any subsequent supply of it. Thus a person in Mr Arachchige's position who deals in phone cards that are credit
vouchers
need not pay
VAT,
as long as he buys and sells them for less than their face
value
(which will almost always be the case). There is an exception to this, which I will consider more fully in due course, where the person who ultimately provides the goods or services does not account for
VAT.
In such a case, Mr Arachchige would be liable for
VAT.
![]()
iv) However, if a
voucher
is a retailer
voucher
then the consideration is only disregarded on the initial issue of the
voucher.
Any subsequent supply of the
voucher
is dealt with under Schedule 10A paragraph 6. In Mr Arachchige's case the phone cards can only be used to obtain telecoms services which are standard rated. Thus Mr Arachchige's supply of phone cards is, on the face of it, chargeable at the standard rate. The other side of the coin, of course, is that he can deduct input tax on the amount that he himself paid for the phone cards.
i) Turnover tax across the EU is intended to be a coherentsystem;
and the coherence can be maintained provided that, if tax is not paid on the issue of a
voucher
in one member state it is paid on the supply of the
voucher
or the services for which it is redeemed in another member state (§ 4);
ii) If the phone cards issued by IDT had been retailer
vouchers
there would have been no question but that the supply in the United Kingdom by distributors to members of the public would have attracted
VAT
(§ 13);
iii) The principles of avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition are general principles of the Sixth Directive (§ 95). Arden LJ expanded on this:
"One of the objectives of the directive is the harmonisation of rules on turnover taxes … and the Directive contains mandatory rules as to which supplies shall be taxable and where those supplies are deemed to take place. It must follow from these provisions that one of the objectives of the Directive is to prevent situations arising in which a taxable supply escapes taxation because it is not caught by the legislation of member states. I therefore reject Mr Lasok's submission thatVAT
is simply a territorial tax and if one member state fails to impose
VAT
that cannot result in the imposition of
VAT
by another member state: as I see it, it is a necessary corollary of the principle of non-taxation, as this case shows, that this can occur."
iv) If neither the issue of phone cards for Interdirect's telecoms services nor the supply of those services to persons within the EU is subject to
VAT
the principle of avoidance of non-taxation is infringed (§ 99);
v)
This conclusion is not altered by the place of supply rules (§§ 102-107);
vi)
In applying the place of supply rules, the issue of a phone card is no more than a promise to make telecoms services available or to procure that they are made available, and therefore itself constitutes a supply of telecommunications services (§ 107);
vii)
When a phone card is issued its place of supply is governed by article 9 (2)(e) (§ 107);
viii)
The court has an obligation, so far as possible, to interpret domestic legislation so as to avoid infringing the principle of non-taxation (§ 112).
"The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not the right is exercised)."
"Therefore the position appears to be the following:
(i) if the supplier of the telecoms service belongs in the UK, the supply of the card is made in the UK (section 7(10) and no application of Article 17);
(ii) if the supplier of the telecoms service belongs in the EU but not in the UK, the supply of the phone card takes place within the EU and not in the UK (section 7(10) and no contrary provision in SI 1992/3121);
(iii) if the supplier of the telecoms service belongs outside the EU, the supply of the phone card takes place in the UK (section 7(10) overridden by article 18)."
i) As found by the Tribunal some of the phone cards that Mr Arachchige bought and sold were phone cards issued by IDT. In accordance with the ruling of the Court of Appeal those cards would be taxed at the distribution stage. However, when they reached the retail stage of the chain of distribution they would fall outsideVAT.
The net result of this would be that
VAT
would be lost. The distributors would have recovered input tax on their purchase of the phone cards as would Mr Arachchige himself. Unless he was liable to account for output tax on his own sales, no
VAT
would ultimately be paid. That would flatly contradict the ruling in IDT.
ii) In IDT Arden LJ said in terms that if the cards under consideration had been retailer cards there would be no question but that supplies of them after the initial issue would have attracted
VAT
in the United Kingdom. But the Tribunal's decision means that many of them will not.
iii) One possible consequence of the Tribunal's decision would be that Mr Arachchige would be required to register for
VAT
in every member state in which the redeemers of phone cards provided telecommunication services because he would be treated as having made supplies in each of those member states. That can hardly be supposed to have been Parliament's intention. Moreover, if the Tribunal is right a business whose turnover exceeds the registration threshold if conducted in one member state may escape from
VAT
completely if it is treated as a series of separate businesses (each one of which is below the relevant registration threshold) making supplies in a multiplicity of member states.
iv) If article 21 has the consequence that the Tribunal ascribed to it in this case, then it ought to have been determinative in IDT too. That necessarily entails that IDT was wrongly decided. But it bound the Tribunal (and it binds me too).
"The effect of art 21 is that the supply of a right to services will be treated as if it were supplied in the same place as the underlying supply to which the right relates, whether or not the right is exercised."