The Civil Division of the Court of Appeal handed down judgment in the case of Arachchige v Revenue and Customs [2010] EWCA Civ 1255 on 8th November 2010. The case concerned the proper place of supply of telephone cards sold by a UK trader and bought by a customer in the UK; specifically, could the place of supply for the purposes of Article 21 of the Value Added Tax (Place of Supply of Services) Order SI 1992/3121, (the Place of Supply Order), be the EU Member State of the entity providing the telecommunications service.

The appellant sold phone cards for destinations in Europe, Asia and Africa. A switch device recorded the use of a card when a call was made. All such switch devices were located in the UK, and generally cards could only be used by an individual calling from the UK. Upon receiving a VAT assessment for 1 May 2003 to 31 January 2005 of £43,289.00 the appellant appealed against the assessment in respect of the phone cards supplied by a telecoms company operating in a different EU Member State.

The relevant EU legislative provision was Art. 9(1) of the Sixth Directive (Council Directive 77/388/EEC) (the Directive) which provides that supplies are where the appellant’s businesses are established; this was transposed to UK law in s. 7 of the Value Added Tax Act 1994 (the 1994 Act). The phone cards sold were “face value vouchers” as defined by Sch. 10A of the 1994 Act. Para 2 of Sch. 10A clarifies that the supply of the voucher is the supply of services, and not of goods. Of most relevance is Art. 21 of the Place of Supply Order, which provides in Art. 21(1) that, “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)”. This article was amended in 2006 after which date it was clear that the appellant’s case would be treated as being in the UK.

Before the VAT Tribunal, it was held that Art.21 of the Place of Supply Order pre-amendment did not give rise to an assumption that the supplier of the right was also the supplier of the service and a non-UK but EU supplier will render the supply non-VATable. The respondents appealed successfully to the High Court. Applying HM Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] EWCA Civ 29, the judge highlighted that to prevent tax avoidance it was necessary to impose VAT liability, the appellant not being registered for VAT in another EU Member State. Alternatively, interpreting the appellant’s business as a supply of services and not merely a supply of “a right to services”, Art. 21 of the Place of Supply Order would be interpreted so that the place of supply was the UK.

Before the Court of Appeal, the issue, concerning the meaning and effect of Art. 21 of the Place of Supply Order, was formulated as whether the wording of Art. 21 was so clear that it was impossible to interpret it consistently with Art. 9(1) of the Directive following principles espoused in Case C-106/89 Marleasing SA v La Commercial Internacional de Alimentation SA [1990] ECR I-04135.

Agreeing with the submission of the appellant, the court held that it was impossible to interpret Art. 21(1) of the Place of Supply Order to automatically identify the “place of supply of services” as also being the “place of supply of a right to services” and thus it was impossible to interpret Art. 21(1) in conformity with the Directive.

Upholding the alternative argument propounded by the High Court, the court found that as the sale of phone cards were a “supply of service” rather than a “supply of a right to services”, the place of supply was the UK.

Dismissing argument that the High Court had made its decision referring to Art. 9(2) of the Directive, rather than Art. 9(1) with which the appeal was concerned, the court held that the High Court had made only general description, and had not used the language of that particular Article. Distinguishing the case of Case C-40/09 Astra Zeneca UK Ltd v Commissioners for Her Majesty's Revenue and Customs [2010] STC 2298, which found that face-value vouchers were not a supply of goods, the court highlighted the case related to the distinction between the supply of goods and supply of services as distinct from a supply of a right to services and a supply of services.

Dismissing the appeal, the court held that the place of supply being the UK, the sales of the contested phone cards did attract VAT.