11 March 2026
VAT treatment of prepaid and access based business models
Lycamobile UK Limited, a mobile virtual network operator, sold prepaid “plan bundles” giving customers fixed‑period allowances for calls, texts and data. Some bundles also included roaming or additional services. Lycamobile accounted for VAT only when customers actually used the allowances. HMRC instead assessed VAT on the full amount paid when the bundle was sold, arguing that the bundles were taxable supplies of services rather than VAT vouchers.
Lycamobile argued that the bundles were multi‑purpose vouchers or credits, meaning VAT should arise only on redemption. HMRC argued that customers were buying guaranteed access to a telecoms network for a defined period. That access was the economic reality of what was supplied and was therefore taxable at the point of sale.
The Upper Tribunal agreed with HMRC and upheld the First‑tier Tribunal’s decision. It held that the true supply was the grant of time‑limited access to services, which was an end in itself for customers. The voucher rules did not apply because the bundles were not instruments exchanged for uncertain future supplies. VAT therefore arose when the bundles were sold
Where allowances were later used outside the UK under the use and enjoyment place of supply rules, VAT paid in excess at the point of sale could be adjusted afterwards.
Key takeaway
Businesses offering prepaid credits, subscriptions, passes or bundled access should consider what as a matter of commercial and economic reality is it that customer is receiving. If they are receiving access to services, which are an end in themselves for the customers, VAT is likely to be due when such right is sold, not when it is used, even if the exact place of supply for VAT accounting is not known at that time.
Treating products as vouchers or credits is not straightforward. Businesses should review their VAT accounting treatment and contractual terms where VAT is currently deferred until use, and consider whether the Upper Tribunal’s decision could affect their approach, or result in a VAT risk.