No such thing as a free phone

Electronics giant Thorn has won its appeal against a decision by Customs to tax a mobile phone ‘promotion’ as if each phone was given away free.

In the winter of 1996 Thorn offered all its customers a ‘free’ mobile phone as part of a ‘loyalty’ scheme. All the customers had to do to get the phone was sign a 12-month line rental agreement with Vodac.

Thorn bought the phones from a third party for #190, and was promised #190 by Vodac for every customer who signed a line rental agreement.

Customs & Excise said that Thorn was disposing of the phones ‘free’ of charge, and that it should therefore pay VAT on the purchase price of the phones. Under these terms Customs decided Thorn owed #495,000 in VAT.

Les Allen, the Ernst & Young VAT expert who represented Thorn in the case, said: ‘This seemed an unfair assessment as it meant they were almost being taxed twice, because they were already being taxed on the money from Vodac.’

The tribunal agreed with Allen. It pointed out that ‘this was not a case of Thorn distributing Christmas presents to its customers’. The customer clearly got nothing unless he signed up for a line rental agreement, and handed over direct debit instructions to his bank. Since Thorn had received a ‘consideration’ for the phones, Customs’ assessment was overturned.

‘A lot of mobiles are sold like this now,’ said Allen. ‘So it is important to make it clear that these companies are not giving away free mobile phones.’

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