On December 2, 2010, the European Court of Justice (“ECJ”) rendered its judgment in the UK case, Everything Everywhere Ltd. (previously: T-Mobile (UK) Ltd.). This case concerns the VAT treatment of an additional charge paid by customers who do not make use of an automatic monthly direct debit. The ECJ ruled that the VAT treatment of this surcharge should be the same as the VAT treatment of the primary service.
1. Facts and assumptions
Everything Everywhere is a telecommunications company offering mobile phone services. It invoices its customers on a monthly basis for the mobile phone services provided. Customers are offered a number of alternative methods of payment for settling their monthly invoices. Everything Everywhere charges those customers choosing not to pay via a direct debit an additional GBP 3. This additional charge is listed as such in the company’s general terms and conditions.
The question the ECJ had to answer in this case was whether this additional charge constitutes consideration for a VAT exempted financial service.
2. ECJ judgment
According to the ECJ, offering customers alternative methods of payment for settling monthly invoices is not a goal in itself. Everything Everywhere only offers the possibility of settling an invoice using a method of payment that is most convenient for the customer. This extra service offered by Everything Everywhere does not represent a service that is distinguishable or independent from the primary telecommunications service. Therefore the VAT treatment of the extra charge should be the same as that of the primary service, and can not be considered as a separate exempted payment for a financial service.
3. Practical consequences
By ruling that the method of payment surcharge is an additional service, the ECJ has unfortunately failed to consider the questions brought before the referring court concerning the precise characteristics of an exempted financial service for transactions concerning transfers and payments. As such, it is still not clear for providers of financial services what the exact scope of the VAT exemption is for financial transactions.
What has again become apparent is that the VAT treatment of an additional charge that is paid, should be the same as the VAT treatment of the primary activity. This means that a charge could also fall under the reduced VAT rate or an exemption. For example, the charge incurred for the method of payment chosen for a newspaper subscription is subject to a 6% VAT rate, while the charge incurred for payment of a sports club membership fee is exempt.