Mobile phone operators lose VAT battle

Mobile phone operators have lost a legal battle to reclaim more than £3bn of the £22.5bn they paid to the British government in 2000 for third-generation licences.

The final decision by the European Court of Justice confirmed a preliminary opinion issued last September. It rejected arguments by companies such as Vodafone, T-Mobile, Orange and Hutchison that value added tax was charged in the price paid for licences.

The court made its ruling in two test cases - one involving the UK tax authorities and the other the Austrian authorities. But lawyers say the implications spill over to other European Union countries where 3G auctions were also held, so many billions of pounds/euros in tax revenues are potentially involved.

In the test cases, the mobile phone companies had tried to argue they should have been allowed to deduct VAT on the licences from that charged to their customers, thus making them eligible for a substantial refund from the government.

But the court held that the licence sales were outside the scope of VAT because the auctions by a national regulatory authority did not constitute "economic activity", within the meaning of European tax laws.

Roger Burrows, VAT partner at Grant Thornton, estimated the UK claim alone had been worth £3.3bn-plus but said it had been "a long shot".

The Treasury welcomed the decision. Dawn Primar­olo, paymaster-general, said: "The ECJ has endorsed our position . . . VAT should not be chargeable on the core regulatory and statutory function of government."

Separately, mobile phone companies were involved in another legal battle on Tuesday, in front of the Information Tribunal where the watchdog Ofcom is challenging a ruling that operators must disclose precisely where their mobile phone base stations are.

The dispute stems from a request from a "bona fide researcher" for National Grid references.

The request was refused by Ofcom, which consulted the mobile operators and found they objected on the grounds that the information could be commercially sensitive and disclosure would breach intellectual property rights and compromise public safety.

But the Richard Thomas, the information commissioner, ruled an exemption from the environmental information regulations was not justified, partly because much of the information was already in the public domain.

Ofcom, backed by T-Mobile, is now appealing.