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.
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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.
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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.
My money is on a tax settlement, I doubt people on both sides will like this carrying on. Even if the worst comes to worse I assume they will be bought out by new investors because of the brand recognition and the competitive mvno sector
I mean, there’s definitely brand recognition, but I’m not sure if being recognised as not correctly paying taxes and getting hacked is a good thing!
This sounds like one of those “here’s a tax loophole that no one has thought of” posts on Reddit.
It VAT wasn’t due on the unused portion of a phone contract then surely the big boys like EE would have been using this “loophole” for years.
“didn’t need to pay VAT unless consumers actually used the data”. Well I don’t know much about tax law but.. ha ha ha ha hee hee, oh stop it it’s hurting If you’re with Lyca switch, quick.
It’s like saying, if a customer buys some food, but dose not eat it and bins it. The supermarket dose not need to pay tax on it!
How did this work? Was a portion of the VAT paid refunded to the customer if they didn’t use their allowance or were Lyca just trying to loot it?
CEO Derek Trotter is quoted as saying………
This time next year Rodders, we’ll be millionaires.
No income tax, No VAT…..
No money back, no guarantee (of service).
Black or white, rich or poor.. Our signal might not get to your Dooooooooor!
Great article, but I’m not surprised about lyca mobile. They are diabolical! Only, they throttle you on their so called “unlimited” data plan. Also, don’t buy anything out of plan by topping up. Just,£10 top up for a couple of web pages opened! I hope HMRC gets them good, serves them right!
Time to abandon the ship, porting to different MVNO now.
No mention of the blatant hack where they leaked goodness knows how much subscriber personal information and bank card numbers, which they still deny. Funny how so many people received attempted payments from places like ‘Pontoon Specialists’ and various other unsolicited shops. The common denominator for all these attempted fraudulent payments was of course, Lyca.