A group of mobile phone operators including Vodafone and 02 has lost out on a potential £3.3 billion windfall after a European Court ruled that they should not be allowed to reclaim VAT on their purchases of 3G telecoms licences.
The group, which also includes T-Mobile, Orange and Hutchison, paid a combined £22.5 billion for their licences in a Government-run auction in 2000.
Neither the Government nor the mobile phone operators raised the issue of VAT at the time of the auction. But the mobile phone companies later argued that as the sale was an economic activity it was subject to VAT, which they are entitled to reclaim under EU law.
But Advocate-General Juliane Kokott said today that the state auctioning of 3G licenses is not liable to VAT. “In issuing licences, the state and its institutions were carrying out an activity required of them as public authorities,” she said.
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The Advocate-General’s appeal is not binding but is followed by the European Court of Justice in around 90 per cent of cases. The ECJ has not set a date for its final ruling.
The UK’s VAT and Duties Tribunal referred the case to Europe after the mobile phone companies appealed against the Treasury’s refusal to pay the rebate.
The decision is a blow to the telecoms companies, which many believe overpaid for the 3G licences after British consumers failed to embrace the services, including video downloads, that the technology offers.
The ECJ has also rejected a case brought against the Austrian government on the same issue.
Dennis Knowles, indirect tax partner at Deloitte, said: “The general thrust of the opinion is not surprising, given recent case law and the amount of VAT at stake.
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“If the ECJ follows this opinion, the most significant implications are likely to be on public authorities carrying out functions that are or could be carried out by private operators: the effect could be to bring more activity within the scope of VAT, with clear financial implications for the authorities and those who deal with them.
“Mobile phone operators will be carefully analysing this opinion, particularly given the future demand for fourth and possibly fifth generation technology. It will make companies think twice about entering into contracts with the Government until they have seriously considered all the consequences, including tax.”