VAT top-up

Mobile phone retailers and the government have fallen out over who is to bear the cost of a new tax on pay-as-you-go mobile phone cards.

The Chancellor, Gordon Brown, introduced VAT on top-up payments in April's budget, but a briefing note about the change has only just surfaced.

As a result there has been widespread confusion over how the tax will be levied.

Some big retailers claim it has not been made clear who will pay the tax. Is it them or the mobile phone operators?

A Safeway spokesman told Working Lunch:

"There is confusion over who is responsible for the extra charge and how much it will be. We have stocks of cards but those stocks will run out in the next two to three weeks. We won't restock until the situation is clarfied."

Customs & Excise are insisting they have made the matter clear in a briefing note issued last week.

Loophole

All contract mobile phone users have to pay VAT on their calls but until now, pay-as-you-go users have been exempt. The Chancellor was clearly closing up this loophole.

So how much of a difference will the VAT make?

The first thing to clarify is that the VAT is not on the price of the phone-card itself, but on the margin or the commission made by the retailer on the card.

This is usually around 2% so would add about 3.5p to the cost of a £10 card.

Absorbing the cost

Network operators, Virgin and Orange have already agreed to absorb the costs of the tax.

Likewise, Vodafone will be swallowing the charge.

There will be no change to the number of minutes or service received by Vodafone's pay-as-you-go talk customers when they top-up their phones.

Vodafone statement

But rival operators T-Mobile and mmO2 say that they are still considering the matter.

Squeezing margins

Telecoms analyst, Neil McCartney, says that the operators are stuck between a rock and a hard place.

Costs are less with pay-as-you-go because you don't have to run an expensive billing system, but there's less profit because margins are smaller.

"With pay as you go the operators subsidise the cost of the handset

Operators are reluctant to pass costs on, says Neil

so you want the user to continue buying the cards," says Neil.

"But it's a very competitive market, and everyone is under pressure. There's a reluctance to lose customers by passing the cost on to them."

Tesco say that they're in negotiations with the networks but will continue supplying the cards as normal and have plenty of cards in stock.

Tesco also have an e-swipe card option which allows you to top-up electronically and thus avoid the new VAT.