17th January 2023
In December 2022, the First-tier Tax Tribunal released its judgement in the case of TalkTalk Telecom Ltd v HMRC. The case was in relation to a VAT assessment for £10.6m, which arose because HMRC believed that VAT should have been accounted for on prompt payment discounts.
To some extent, the case is of academic interest because the relevant legal provision is no longer in the VAT legislation. However, the case serves as a warning that contracts should correctly reflect what they are supposed to.
As a reminder of how long VAT cases can take to get to court, the case started in 2014. The assessment, which was appealed, was issued in 2015. At the time in 2014, the VAT legislation said that where a prompt payment discount was offered, then VAT was only due on the discounted amount. This was the case even if the customer did not pay promptly.
This provision was amended in May 2014 so that VAT is now only due on the discounted amount if the customer paid in accordance with the terms of the discount offer, i.e. promptly.
HMRC’s first argument was that the old legislation did not comply with EU law and was therefore deficient, such that VAT should be due on the full amount where a customer had not paid promptly.
There is a principle of EU law called ‘direct effect’ which states that where an EU legal provision has direct effect in a country, i.e. it is binding, then a taxpayer can rely on his EU legal rights, even if those rights have not been implemented (or correctly implemented) domestically. However, the tax authority cannot rely directly on EU law if it has failed to implement, or correctly implement, the EU law (which it should have implemented). An exception to this lies within cases where you can somehow read the domestic law as implementing the EU law, through what is known as a principle of “conforming construction”. This is fair because it is the State who has the power to introduce the law, not the taxpayer. The State should not be able to rely on an EU ‘get out of jail card’ to cover its own mistakes.
The principle of conforming construction says that where an EU Member State is trying to enact EU law, which has direct effect, then so far as is possible, the domestic law should be read as conforming with EU law. This is because it is presumed that the State was doing its best to correctly implement EU law.
It was common ground that the UK law did not accurately reflect the EU law, and that VAT should only have been paid on the discounted amount where the terms of the discount were met. The problem here was that the UK legislation was very clear that VAT was due on the discounted amount, even if the conditions were not met. Therefore, the Court could not read the UK law as giving effect to the EU law. It just did not reflect the EU provisions it was supposed to, and courts cannot amend law, they can only interpret it. TalkTalk won on this point.
However, the second reason which HMRC gave for its assessment, was that TalkTalk did not meet the conditions to account for VAT on the discounted amount in any event. The relevant legislation read:
“Where goods or services are supplied for consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”
The Tribunal went through all the details of how the discounts were offered, the billing process, and the relevant VAT provisions which determine when a service is supplied, and its conclusion was that the prompt payment discount offers were wholly outside the Terms & Conditions which TalkTalk customers signed up to.
The above is an oversimplification because it was a combination of the interaction of the VAT law determining when the supplies were deemed to be made, and the normal contractual T&Cs and the terms of the discount offer which, in conjunction, led the Tribunal to reach its conclusion.
In other words, having won on the legal point, TalkTalk lost the case because based on the facts, it was not offering a prompt payment discount as part of the terms of its contract.
This is, of course, a First-tier Tribunal and since the assessment was for £10.6m, it is likely it will be appealed. But, since the case was largely decided on the facts, it is difficult to see how it can be overturned – it is not obvious that any of the findings of fact are manifestly incorrect.
The important take away from this is not about VAT and discounts, but of the importance of ensuring that contractual documentation reflects what it is supposed to.
If you have any VAT enquiries, please contact Phil Salmon, Partner, or your usual haysmacintyre contact.