The UK Court of Appeal released its judgment on 27 January 2006 in a case concerning a structure for the sale of multifunctional phone cards issued from Ireland by IDT but used in the UK

The cards were issued by the appellant, an Irish company, to distributors and retailers in the UK who, in turn, sold them to customers in the UK. Those customers used the cards to obtain telecom services from an Irish telecommunications entity associated with IDT.

The structure takes advantage of an arbitrage opportunity between the Irish and UK VAT treatments of the cards.

Under Irish VAT law, the cards are seen as prepayments for telecoms services. But since the cards are supplied to taxable persons in the UK, their supply was treated as outside the scope of Irish VAT.

Under UK VAT law, the cards were treated as credit vouchers and, under Schedule 10A paragraph 3, no UK VAT arose on their supply in the UK since there was no consideration in excess of the face value on their supply in the UK.

HM Revenue and Customs (HMRC) sought to argue that the 'back-stop' provision in the face-value vouchers rules at paragraph 3(3) Schedule 10A VATA 1994 entitled them to disregard the 'no consideration in excess of face value' rule and to subject the full consideration in the UK to UK VAT, as the supplier of the telecom services obtained by the use of the cards 'fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them'.

It would appear that a clear message from the Court of Appeal is that it will not support arbitrage of different Member States' place of supply rules to remove the application of VAT to cross-border supplies and that it will expect the legislation to be interpreted in such a way that VAT is applied to the supplies (however strained that interpretation might be, i.e. in this case the Court declined to be swayed by the inference that paragraph 3(3) was actually legislated for an entirely different reason).