VAT and prompt payment discounts

The Upper Tribunal has held that a separate agreement varying the normal terms and conditions for telecom services was not one that provided for a discount for prompt payment: TalkTalk Telecom Ltd v HMRC [2024] UKUT284. The arrangements involved a variation or replacement of the terms on which bills were paid and only applied to those customers who accepted the variation. As such, the terms and conditions of payment for other customers were not affected and the consideration for VAT purposes of supplies to them was not reduced by the possibility of a prompt payment discount.

Background

TalkTalk supplies fixed and mobile telephone and internet services to customers. Most customers were billed monthly in advance under the terms and conditions of service. However, in 2014, TalkTalk offered most retail customers a 15% discount if they paid their bills within 24 hours of receiving them (the Speedy Payment Discount or SPD). Only approximately 3% of customers took up the SPD offer.

At the time, VATA 1994 Sch 6 para 4 provided that: “Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms”.

TalkTalk took the view that it offered its services on terms which provided for a prompt payment discount such that the 15% discount applied to all its supplies under those terms, whether or not customers made prompt payment on the discounted terms.

The FTT agreed that the natural reading of para 4 was that it applied to all services provided on terms which allowed for a prompt payment discount, considering that it was not possible to read the legislation consistently with the provisions of the Principal VAT Directive (which made it clear that the intention was that only supplies to customers that obtained the discount were affected). (The UK legislation was changed in May 2014 to clearly limit the scope of the provision accordingly.) However, the FTT held that there were no terms allowing for a discount for prompt payment in this case. There was simply a variation if the customer accepted the SPD offer and that did not fall within the terms of para 4.

TalkTalk appealed the decision on the question of whether the SPD arrangements provided for a prompt payment discount, whilst HMRC appealed on the question of the correct interpretation of the scope of para 4.

Upper Tribunal

TalkTalk contended that, contrary to the decision of the FTT, there was no requirement for the prompt payment discount to exist in the context of a pre-existing contractual arrangement; the requirement that goods or services are supplied on terms allowing a discount for prompt payment means no more than that the customer has the option of paying less if they pay earlier. Alternatively, TalkTalk argued that the SPD payment option did form part of the pre-existing contractual relationship.

The UT held that terms that “allow a discount for prompt payment must provide for, at least, two payment dates: a standard due date for payment and an earlier optional payment date. The terms must then allow a discount if payment is made on the earlier date.” The SPD was not a unilateral variation of the original terms, but an offer by TalkTalk to vary them and they were only actually varied where a customer accepted the offer and made the early payment under the SPD. The original terms contained no provisions regarding a prompt payment discount and 97% of customers made payments under those original, unvaried terms.

This meant that, for those customers who accepted the SPD offer, the terms were varied and a lower payment was made. VAT was chargeable on those supplies only on the lower consideration, of course. But for the vast majority of customers who did not accept the SPD offer, payment was made under the terms of the original contract which did not allow for a prompt payment discount and the consideration for VAT purposes was the full amounts paid by those customers.

Having held that the SPD terms did not amount to a prompt payment discount, the UT declined to consider HMRC’s arguments that para 4 (as it read at the time) should be read as only applying to discounted payments, rather than all payments made under contractual terms which allowed for a prompt payment discount.

Comment

Whilst TalkTalk won (at the FTT at least) on the technical arguments in this case around the scope of the prompt payment discount in para 4 at the time, it lost (both before the FTT and UT) on the contractual arrangements. In essence, the Tribunal had taken a narrow view of the meaning of “on terms allowing a discount for prompt payment”, considering that the relevant terms must be in the original contractual documentation and not simply part of a separate agreement allowing variation of those terms. This is, arguably, a very restrictive approach to the legislation and one might wonder whether the approach is consistent with the commercial and economic reality of the arrangements put in place.