May seems to be a very busy month for everyone dealing with vouchers.
First the ECJ’s judgement in the case C-520/10 Lebera has been published on 3 May 2012, which was shortly followed by the text of the proposal for the new Voucher Directive changes to the UK voucher rules, effective as of 10 May 2012. Quite a busy week for a subject discussed for years without any major breakthrough.
I am not going in all details here. I will keep this very simplified – there are bunch of other reviews full of tax technical jargon on the Net. Sufficient to say that the judgement came out as expected by majority of the observers (well, maybe not for HRMC). Let’s take a look on a very simplified explanation of this case.
Lebara was selling prepaid telecom cards for international calls from UK to distributors in other EU countries. These distributors sold the cards onward to their customers, who were either companies (B2B) or private individuals (B2C). The customers used these cards outside the UK.
Due to normal VAT rules one would expect that no UK VAT should be charged on such sales (either because it was a sale of a voucher or because it was a cross-border B2B sale of telecoms services). HMRC nevertheless requested for Lebara to charge and pay-up UK VAT as part of the cards were used by private individuals and such B2C telecom services are subject to UK VAT (if provided by a UK based TelCo). HMRC’s argumentation was that two supplies took place in parallel – one when the card was sold to distributor and a second one when the card was by the final customer to receive the telecom service.
Lebara appealed against the position of the HRMC and the issue was eventually referred to ECJ. ECJ has agreed with Lebara. It basically confirmed that only one supply can be made for any single payment (consideration):
31 Given that a supply of services is taxable only if it is made for consideration, which presupposes reciprocity between the service provided and the remuneration constituting the value given in return for that service,… it must be borne in mind that the telecommunications services operator receives only one actual payment in the course of supplying its telecommunications services.
32 In those circumstances, the telecommunications services operator cannot be treated as carrying out two supplies of services for consideration …, one to the distributor and one to the end user.
The judgement of the ECJ can therefore be easiest displayed in the following way:
Another important thing with the judgment is that ECJ never mentioned word “vouchers”. It ruled that Lebara in this specific case has been providing telecom services directly (as opposed to sell of a voucher):
34 In that connection, it should be noted first that, by the sale of the phonecards, the telecommunications services operator supplies the distributor with all the information necessary for making international phone calls of a fixed duration by means of the infrastructure provided by that operator, which means that it transfers to the distributor the right to use that infrastructure in order to make such calls. The telecommunications services operator thus supplies a service to the distributor.
35 That service is covered by the term ‘telecommunications services’ as used in the tenth indent of Article 9(2)(e) of the Sixth Directive. That provision defines that term broadly, so as to cover not only the transmission of signals and sounds as such, but also all services ‘relating to’ the transmission, and the related transfer of the right to use capacity for such transmission.
This fact is important to remember as ECJ has limited its judgement only to the provision of prepaid cards as telecom services; this judgement should not be applied indiscriminately to all other supplies of prepaid cards and vouchers. This case defines what is considered to be a telecom services and not what is a Single Purpose Voucher (“SPV”).
New UK voucher legislation
Contrary to the above conclusion UK has used the Lebara judgement as an excuse to update its legislation related to Single Purpose Vouchers. As of 10 May 2012 all sales of SPVs are basically treated as advance payments for goods and services, which can be obtained for the voucher. This means that VAT is due immediately (i.e. when the SPV is issued) and again at any resale of the SPV in a distribution chain (if applicable).
Now, to make it clear: vouchers and their treatment are not yet defined by the EU VAT legislation (this has yet to be addressed in the new Voucher Directive) . Hence, any EU country can decide by itself what represents a voucher and how to treat vouchers from the VAT point of view (i.e. when and how to tax them – at the moment when they are issues or when they are redeemed). This can eventually lead to a double taxation or not-taxation with VAT. That is the right of the various EU countries and that is fine. What I do not like is that UK used the Lebara case as an excuse and explanation, why it had to amend its voucher legislation. It would nicer from them to state that they wish to collect more VAT and not hide between ECJ.
I expect that other EU countries will follow UK’s lead and amend their legislation accordingly – they will collect more VAT (VAT will be charged on all SPVs and not only those redeemed by the customers) and sooner (i.e. at the time when the voucher is issued and not only when it is redeemed). Double win for the state budget.
In addition countries can also use this new legislation as an excuse to cancel tax rulings, which they might have concluded with various voucher distributors in the past, which prohibited the tax authorities to tax non-redeemed vouchers and nay commission related to them.
At least the new UK voucher legislation seems to be compliant with the proposal of the new EU voucher directive. This is another reason why I believe that other EU countries will follow UK’s lead and implement similar legislation in the near future.
New EU Voucher Directive
My original intention was to provide a through overview of the new Voucher Directive proposal and its future implications. After re-reading it several times I had more questions than answers and thus decided to discuss it in the next post (or more likely several next posts).
The good news about the proposal is that the Voucher Directive will become effective only as of 1.1.2015. The bad news is that nothing prohibits the various EU countries to implement the wording of the Directive much earlier (see above UK example) – or to implement something else in the meantime. This means that if your company is active in this area it makes a lot of sense to review your business model for any exposures and optimization opportunities and to get prepared for the new voucher legislation ASAP.
In the meantime let’s have a very high level overview of the most important items covered in the directive proposal. It deals with three types of vouchers:
SPV – single purposes voucher
It must 100% clear, which goods and services can be redeemed, where, by whom, etc. Therefore it is possible to immediately define the place of supply (i.e. which EU country will charge VAT) and the relevant VAT rate (standard/reduced).
Bottom line: VAT is charged when the SPV is sold – exactly the same as if the goods or services would have been sold.
MPV – multiple purpose voucher
If it is not clear at the exact moment when the voucher is issued which VAT rate should be applied then the voucher is to be treated as MPV. This uncertainty could be for example either due to the fact, that the standard or reduced rate could apply (e.g. shopping voucher for adult or children cloths) or because the place of supply is not clear (e.g. the voucher can be used in various EU countries) or for whatever other reason.
No VAT is charged when the MVP is sold but the MPV must be assigned a nominal value – the difference between the nominal value and the price for which the MVP is sold represents the distribution service, which is taxed with VAT.
Bottom line: No VAT is charged for the sale of MPV; VAT is charged at the moment when goods or services are redeemed for the MPV. In addition the distribution services is charged with VAT. The value of the distribution services is represented by the difference between the nominal value of MPV and its sales price.
They are treated as discount, which reduces the VAT basis (sales price) at the time of the sale of goods and services. Nothing fancy here. Of course their distribution will be taxed with VAT.
What does the Voucher Directive not deal with?
On the first glance at lest the following two items are missing from the directive proposal:
MPV without nominal value
The Voucher Directive defines that every MPV must have a nominal value assigned to it. Well, I can understand that the EU can force every company in the EU to assign a nominal value to a MPV it issues. I can understand this. However, what happens if MPV is issued by a company outside the EU and no nominal value is assigned to it – will this result in a prohibition of distribution of MPV without nominal value in the EU? Will EU companies be prohibited to purchase and sell such MPVs? This does not seem logical. What we will probably see will be that tax authorities in the various EU countries will assign an arbitrary nominal value to MPVs and collect VAT based on their assumption.
Voucher Directive does not deal with the cash refunds. They are briefly mentioned in the beginning of the draft proposal (in the “introduction” part) and then nowhere else. It is a shame that the EU will miss the opportunity to solve this issue as well – it could at least implement the current ECJ case-law into the VAT Directive.
EU is going to expand its taxable base and indirectly collect VAT from both SPV and MPV (both redeemed and unused) which will ultimately lead to more VAT being connected. Combine this with the already implemented and future increases of VAT rates and this adds up quite considerably (btw, if you take a look at the calculations of the VAT financial impact you will notice that they are all done with an estimated VAT rate of 25% – quite an increased to VAT rate of 20%used not so long ago for similar calculations).
I definitely need to read the Voucher Directive proposal a couple more times and then think some more about it.
Incidentally, I am leaving for EU VAT B2C 2015 Work Group meeting tomorrow, where we will discuss the voucher developments and other e-biz related issues. I’m looking toward it.
I will keep you posted.