Mobile network operator Lyca Mobile, which is a virtual operator (MVNO) on EE’s platform in the UK, is facing a significant financial hit after a Tax Tribunal ruled in HMRC’s favour over a £51m dispute related to the VAT treatment of customer “bundles” (those sold over a period of 7 years). But the operator can still appeal.
According to the company’s most recent accounts (here), Lyca had 1.7 million subscribers at the end of 2022, a churn rate of 9% and revenues of £145m (up from £138m). But they also made a loss after tax of £25.1m, which compares with a profit of £1.8m in 2021. Lyca’s accounts further noted that they were still in dispute with HMRC over an issue related to the treatment of Value Added Tax – a provision of £99m was recorded to reflect their current best estimate of exposure.
The accounts also included an independent auditor’s report from PKF Littlejohn, but the auditor stated that they had “not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion” (i.e. they couldn’t sign off the accounts). Much of that related to the recoverability of a due balance of nearly £150m (here). The balance included “£105,979,000 due from related parties“, as well as “£41,704,000 due from directors and parties associated with directors” and the “completeness and accuracy of the deferred income balance of £10,870,000” related to creditors.
Suffice to say that Lyca Mobile is currently in a difficult financial position and the Tax Tribunal’s recent decision will only add to that. According to the FT (paywall), Lyca had attempted to argue that it didn’t need to pay VAT unless consumers actually used the data (mobile broadband), call and text allowances within their bundles.
However, the Tribunal sided with HMRC and ruled that VAT was chargeable at the point of sale, regardless of whether customers actually used their allowances. The only exception appears to have been on certain bundles sold before November 2017, where the allowances were used outside the European Union.
A Spokesperson for HMRC said:
“We are pleased with the judgment, which is consistent with the VAT treatment applied across the telecoms sector.”
The actual ruling confirmed Lyca’s legal liability in principle, but the amount that the mobile operator may have to pay back must still be determined between Lyca and HMRC “by mutual agreement or, if necessary, by us at a subsequent date”.
The development follows last year’s cyberattack (here), recent problems with 5G connectivity (here) and the conviction of Lyca’s French entities for money laundering and VAT fraud – the latter is something the operator is appealing against.
Lyca did not provide an immediate comment to the FT, although the operator, which separately gifted £2.15m to the UK Conservative Party between 2011 and 2016, can appeal against the Tax Tribunal’s ruling.