Three UK Accused of Overcharging for VAT on Contract Cancellations

Ofcom has begun an unofficial probe after mobile operator Three UK was accused of “ripping off” subscribers who choose to cancel their contracts early, which it allegedly does by failing to fully deduct 20% of Value Added Tax (VAT) from the remaining months of service rental.

According to Three UK’s Terms & Conditions (here), the cancellation fee works as follows: “Lump sum equivalent to the total of all the monthly charges still remaining during the minimum term of your agreement less a discount of: (i) 3% for new connecting customers who are in the first minimum term of their agreement with us; or (ii) 10% for existing customers that have upgraded or renewed their existing contract with us for a further, subsequent minimum term.”

In other words, you pay a total lump sum to reflect the remaining months of your contract and a small discount of 3-10% may also be applied. The problem is that Three UK appears to have applied VAT to some or all of those remaining months (bills) for a number of subscribers, but generally VAT should only be applied to services rendered and as such if you’re no longer receiving the service itself then it’s supposed to be deducted.

The other major mobile network operators (O2, EE and Vodafone) all automatically deduct VAT from any remaining months (e.g. a service that cost £20 inc. VAT per month becomes £16.67 +vat). However this may only apply to the service rental, while VAT should still be applied to other outstanding payments or the handset (i.e. “additional goods or services“); such as if you took out a service and handset bundle.

However an investigation by Michael Green, a Cambridge law graduate and founder of CaseHub, has alleged via This is Money that Three UK doesn’t always appear to be deducting VAT properly from its cancellation charges. The operator denies that it charges VAT on cancellation fees, although they’ve yet to explain the discrepancies observed on related bills.

A Spokesperson for Three UK said:

“The way we calculate early termination fees is clearly set out to customers when they join us and is available in our price guide and terms and conditions”

A Spokesperson for Ofcom said:

“It’s important people wishing to leave their mobile contracts early are fairly treated. We are contacting Three to ask it to explain its policy.”

Ofcom has yet to launch a formal probe or even a full investigation, although they are liaising with Three UK in order to better understand their side of the argument before making a decision.

Hopefully Michael Green and those affected will also be providing the regulator with all of the evidence they need in order to conduct a proper probe and get to the bottom of this issue.

We would have also liked to see a little more data on this, particularly surrounding the question of whether or not the complaint applies to SIM-Only and / or handset bundles because VAT can complicate matters on the latter.