Policy paper

VAT: telecommunication services used outside the EU – use and enjoyment rule removed

Published 20 July 2017

Who is likely to be affected

Suppliers of mobile telecommunication services, private consumers and non-business users who consume telecommunication services outside the EU.

General description of the measure

This change alters the place of supply for VAT purposes of mobile telecommunication services made to UK non-business users (for example, private consumers) when they use their mobile phones outside the EU. It aligns the UK treatment of these services with internationally agreed guidelines. The change means that UK VAT will be charged on roaming services used by UK consumers outside the EU.

Currently UK VAT is charged when UK consumers use their mobile phones within the EU (including the UK) but, because of the ‘use and enjoyment’ rule, it isn’t charged when they use them outside the EU. This is because mobile phone use in the EU is treated as taking place where the customer lives, but use outside the EU is treated as taking place where the service is consumed. For example, a call made by an individual who lives in the UK on their mobile while on holiday in the USA isn’t subject to UK VAT as the supply is treated as taking place (being used and enjoyed) in the USA.

The UK adopted this approach before the EU adopted the existing place of supply rules for telecommunication services. At that time the place of supply rule was that tax was due where the supplier was located. Without the ‘use and enjoyment’ rules, companies could have located outside the EU in a jurisdiction which didn’t apply VAT or a similar tax to exported services. This would potentially have resulted in people living in the UK not being charged VAT on their mobile phone use in the UK.

The agreed international approach is now to tax mobile phone use in the country where the user of the phone lives. This means that a ‘use and enjoyment’ rule is no longer necessary and may result in double taxation. The UK already adopts this new approach for EU use. This measure introduces the same treatment for non EU use.

The change is being made now because there is evidence that the ‘use and enjoyment’ rule is being exploited by businesses to argue that tax isn’t due on certain supplies of mobile telecommunication services within the UK. Making this change counters a threat to about £1 billion of revenue.

Policy objective

This will resolve the inconsistency between the taxation of mobile phone use in the EU and that applied outside the EU. The change will bring UK VAT rules into line with the internationally agreed approach. It will also ensure mobile phone companies can’t use the inconsistency to avoid UK VAT.

Background to the measure

This measure was announced at Spring Budget 2017 and included in the Overview of Tax Legislation and Rates (OOTLAR) paragraph 2.29. Draft legislation was published 21 April 2017 for technical consultation.

Detailed proposal

Operative date

The measure will have effect in relation to supplies made on or after 1 November 2017.

Current law

All references are within the VAT Act 1994 unless otherwise stated:

• section 7A(2)(b) details the current general rule for the place of supply of services to anyone who is not a relevant business person (for example, a private consumer), namely the country where the supplier belongs
• section 7A(4) defines who is a relevant business person
• section 9 details the rules for determining where a person belongs, covering both the supplier and the recipient of a supply of services
• schedule 4A is split into three Parts - (1) General Exceptions, (2) Exceptions relating to supplies made to relevant business person and (3) Exceptions relating to supplies not made to relevant business person - these set out the specific rules that apply to determine the place of supply of certain services
• schedule 4A Part 1 paragraph 8 (‘paragraph 8’) sets out the definition of telecommunication services and how the special ‘use and enjoyment’ place of supply rules apply to them
• schedule 4A Part 3 paragraph 15 (‘paragraph 15’) sets out the specific place of supply rule for electronically supplied, telecommunication and broadcasting services when supplied to private consumers, which applies subject to paragraph 8
• in addition Council Regulation 282/2011 (the VAT Implementing Regulation), Article 24a provides for a series of presumptions on the location of the customer which are directly applicable in the member states

Proposed revisions

Secondary legislation will remove telecommunication services from paragraph 8 and introduce a new paragraph 9E into Part 2 of Schedule 4A setting out the special ‘use and enjoyment’ provision for telecommunication services supplied to relevant business persons. The effect is that the specific place of supply rule in paragraph 15 will apply to supplies of telecommunication services made to private consumers and the special ‘use and enjoyment’ provisions will only apply where such supplies are made to relevant business persons.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
+ 45	+ 65	+ 65	+ 65	+ 65

These figures are set out in Table 2.1 of Spring Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing document published alongside Spring Budget 2017.

Economic impact

This measure isn’t expected to have any significant macro economic impacts.

Impact on individuals, households and families

The measure isn’t expected to impact on family formation, stability or breakdown.

Limited information from the telecommunications industry suggests that about half of British tourists use their phone abroad. They often use Wi-Fi connections in order to avoid charges or purchase local SIM cards. Where telecommunication companies choose to pass on the VAT to any of the 5 million to 10 million British tourists who use their phone beyond the EU each year, it could mean some of their customers getting less telecoms services for their payment or incurring a slight payment increase. As a broad estimate, where it is charged on, customers could pay an additional £10 to £15 across the year. However, for a typical customer it is more likely to be around £5 across the year.

Equalities impacts

It isn’t anticipated that this will impact specifically on any equalities groups.

Impact on business including civil society organisations

This proposal is expected to have a negligible impact on business expenditure but will affect telecommunication businesses providing services to consumers travelling outside the EU.

These businesses may currently choose to make adjustments to the VAT they declare to allow for non-taxable use by their UK consumer contract customers outside the EU under the special ‘use and enjoyment’ provisions in paragraph 8. This proposal means that those adjustments will no longer be required.

One-off costs for businesses include familiarisation with the new rules and changing their systems to account for VAT on telecoms services consumed outside of the EU.

Ongoing savings include not having to make adjustments for non-taxable use. Overall telecommunications businesses will pay more tax as they will now need to account for VAT on all their supplies to UK consumers.

Small and micro business assessment: small businesses customers, identified as such to their suppliers, should see no difference as the ‘use and enjoyment’ provision remains for business to business transactions. Those that aren’t may be charged VAT as a consumer on mobile phone use outside the EU.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

HMRC will incur negligible costs in implementing this change.

Other impacts

Justice Impact Assessment: the measure is unlikely to have a significant impact on litigation as the number of suppliers in the market is small. The measure doesn’t create any new offences or penalties.

Competition Impact Assessment: the measure doesn’t limit the number or range of suppliers or affect their ability to compete, nor does it limit the number of choices or information available to consumers.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

HMRC will monitor VAT receipts in the sector and keep taxpayer behaviour under review.

Further advice

If you have any questions about this change contact:

Colin Scott-Morton of VAT Supply Team by telephone on 03000 585 968 or by email: colin.scott-morton@hmrc.gsi.gov.uk or Kerry Smith by telephone on 03000 566 007 or by email: kerry.smith1@hmrc.gsi.gov.uk.

Declaration

The Rt Hon Melvyn Stride MP, Financial Secretary to the Treasury, has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.