A UK tax Tribunal has ruled against mobile network operator Lycamobile in a significant VAT case, siding with the tax authority, HM Revenue and Customs (HMRC). The decision, handed down earlier this month, clarifies when value-added tax is due on prepaid mobile service bundles and has broad implications for the telecommunications sector.

The Upper Tribunal, Tax and Chancery Chamber, dismissed Lycamobile’s appeal against earlier rulings. The judges, Mr Justice Cawson and Judge Thomas Scott, upheld the finding that VAT must be charged at the full point of sale for prepaid plan bundles, not when customers later use the included minutes, texts, or data. This ruling concludes a long-running dispute centered on Lycamobile’s sales practices between 2017 and 2019.

Core of the Dispute

The case centered on Lycamobile’s treatment of VAT for its prepaid “plan bundles.” The company had accounted for VAT only when customers consumed the services within a bundle. HMRC argued this was incorrect, asserting that the tax was due on the full bundle price at the moment of purchase. The tax authority issued assessments totaling more than £50 million for the period in question.

The tribunal agreed with HMRC’s position. It determined that the bundles constituted a supply of telecommunications services, not vouchers redeemable for future services. Customers purchasing a bundle were acquiring a guaranteed right to access specified allowances over a fixed period, typically 30 days. This right of access itself was deemed the “real supply” for VAT purposes.

Bundles Versus Vouchers

A key argument rejected by the tribunal was Lycamobile’s claim that its bundles should be treated as electronic multi-purpose vouchers. The judges found that specific VAT Rules for vouchers did not apply to these prepaid plans. They noted that only an estimated five to ten percent of allowances in such bundles are typically used, supporting the view that customers are primarily paying for guaranteed availability, not for usage.

The tribunal compared the bundles to subscription services like streaming platforms or gym memberships, where payment is made for access regardless of the extent of actual use. Consequently, VAT is due on the entire upfront payment, even if a customer uses only a fraction of their allotted minutes or data.

Implications for Mobile Operators

This ruling has direct consequences for Mobile Virtual Network Operators (MVNOs) and other distributors of prepaid mobile services. It removes a potential tax advantage related to unused allowances and provides clarity on HMRC’s stance regarding the timing of VAT liabilities.

For the mobile industry, the interpretation affects several areas. Operators may now need to account for VAT on bundle sales immediately, which could increase cash-flow pressure. Some MVNOs may review their bundle pricing or allowance structures if unused capacity continues to attract full VAT. Retailers selling these bundles might also see margin changes if operators adjust wholesale pricing to reflect the new tax treatment.

Finance departments across the sector will require clear processes to distinguish the VAT timing for bundle sales versus traditional pay-as-you-go credit top-ups. The tribunal did acknowledge a limited exception for some bundles with non-EU roaming features, relating to historic EU VAT rules on “effective use and enjoyment” outside the EU, but this only applied to periods before November 2017.

Market Context and Next Steps

Lycamobile, which positions itself as one of the UK’s largest MVNOs, had argued that bundle purchases were merely a preliminary step before service consumption. The tribunal’s rejection of this view sets a precedent that is particularly relevant for operators selling SIM-only prepaid bundles through retail partners or digital channels, a core model for many MVNOs serving migrant and price-sensitive communities.

The published judgment provides definitive guidance for the industry. While Lycamobile could potentially seek permission to appeal to the Court of Appeal, the tribunal’s detailed reasoning establishes a clear framework for HMRC’s treatment of similar prepaid telecoms products. Other operators with comparable billing models are expected to review their VAT accounting practices in light of this decision to ensure compliance and avoid similar assessments.

Source: Judiciary.uk, UK Upper Tribunal