A telecoms provider has lost its appeal against a decision that, where customers were offered discounts for early payment, VAT was payable on the full amount charged if the discount was not accepted.

Between 1 January and 30 April 2014, the telecoms provider offered customers a discount on certain services if they paid their bills within 24 hours. Only around 3 per cent of customers took up the discount: the other 97 per cent paid the full amount billed, typically by direct debit.

At the time, Paragraph 4(1) of Schedule 6 of the Value Added Tax Act 1994 provided that where goods and services were supplied on terms allowing a discount for prompt payment, the consideration for VAT purposes would be reduced by the amount of the discount, whether or not payment was made in accordance with those terms. Paragraph 4(1) was amended on 1 May 2014 so that the consideration is only regarded as the discounted amount if payment is made on the terms allowing the discount.

The telecoms provider took the view that, where the discount was offered, VAT was due on the discounted amount even where the customer had not taken up the discount. HM Revenue and Customs disagreed and raised an assessment for more than £10.6 million in underpaid VAT. The telecoms provider appealed to the First-tier Tribunal (FTT).

The FTT found that Paragraph 4(1), as worded at the time, meant what it said: the consideration was reduced by the amount of the discount, irrespective of whether the customer actually obtained it. Rejecting the appeal, however, the FTT noted that the discount was not referred to in the telecoms provider's terms and conditions. In respect of services billed in advance, the terms and conditions were only varied at the moment a customer made a payment and thereby accepted the discount. There were thus no terms 'allowing a discount for prompt payment' on a future date and Paragraph 4(1) did not apply. For services billed in arrears, what was offered was, as a matter of VAT law, a post-supply rebate of an amount already due, rather than a discount.

Appealing that decision to the Upper Tribunal (UT), the telecoms provider contended that the FTT had erred in concluding that the discount offer had to exist in the context of a pre-existing contractual relationship and, alternatively, had been wrong to find that the offer was not part of such a relationship.

The UT agreed with the FTT's contractual analysis of the position relating to services billed in advance. It also agreed that, where services were billed in arrears, the offer was not a discount for early payment. In both cases, the services supplied to customers who did not actually take up the discount offer were not supplied on terms allowing a discount for prompt payment. The appeal was dismissed.