Tax authorities yesterday won their appeal in the long-running legal battle over value added tax on phonecards, when the Court of Appeal overturned a High Court judgment. The dispute stemmed from the issue of pre-paid phone-cards, and whether VAT could be charged in the UK when suppliers were taking advantage of different tax rules between European Union states, in effect to provide telecoms services that were VAT-free.

In the Irish Republic, in particular, sums paid for phonecards are treated as a prepayment for telecoms services. They attract VAT on that supply in Ireland, but not if they are supplied to traders outside Ireland. Equally, no VAT is paid in Ireland when they are redeemed. The British authorities wanted to plug the gap in what, in effect, could be a tax-free provision of services by demanding that VAT be accounted for in the UK.