Lycamobile faces HMRC Winding-Up Petition Over £51m VAT Judgment

After an 8-year VAT battle, HM Revenue and Customs (HMRC) has filed a winding-up petition against Lycamobile UK Ltd , a well-known but loss making international mobile virtual network operator (MVNO) seeking a petition debt of around £51m. The petition, reference CR-2024-004816, was lodged by ‘HMRC Solicitor’s Office and Legal Services’ with the Insolvency and Companies Court in London. This petition will likely, eventually, be the final curtain for Lycamobile in its current form given both its protracted VAT Tax Tribunal dispute, which the company lost earlier this year, and the conviction of Lycamobile’s French entities for money laundering and VAT fraud last year which have caused adverse audit statements.

These events have attracted international media attention not least due to links to the Conservative Party and raise serious doubts about Lycamobile’s future. Whilst it is early in the life cycle of the petition, Lycamobile UK Limited, faces a compulsory winding-up order unless it either reduces the petition debt to under £750 or evidences a valid dispute. A stay of the petition might be achieved by lodging an appeal to the Upper Tier Tax Tribunal over the 18th July 2024 decision of the First Tier Tax Tribunal. Lycamobile is currently recorded on the companies court file as a Litigant in Person with no legal representation in place.

HMRC initiated winding-up proceedings against Lycamobile and its sister companies, Lycatel Services Limited (CR-2024-004663) and Lycamoney Financial Services Limited (CR-2024-004728). The petitions were filed on Monday 12 August 2024, 2 August 2024 and 6 August 2024 respectively, according to court research conducted by LEXLAW, the leading firm that defends winding-up petitions and recently obtained an injunction and costs order against HMRC for abusive petition conduct. The telecoms group, owned by British-Sri Lankan entrepreneur and founder Mr. Subaskaran Alirajah, is now facing a critical financial and legal challenge. Media comment from one of our qualified legal experts is available by calling us on 02071830529.

Our experienced City of London solicitors and barristers regularly assist companies facing a HMRC winding up petition; individuals served a statutory demand; or creditors owed money and considering issuing a winding up petition.

Lycamobile’s 14x Petition History…

Case No.	Case Title	Case Type	Alt No.	Filed
CR-2010-003839	Lycamobile UK Limited	Companies – Petition – Winding Up Petition	BAC – 3753/2010	06-05-2010
CR-2010-004302	Lycamobile UK Limited	Companies – Petition – Winding Up Petition	BAC – 2005/2010	09-03-2010
CR-2014-007812	LYCAMOBILE UK LIMITED	Companies – Petition – Winding Up Petition	BAC – 7429/2014	17-10-2014
CR-2014-011398	LYCAMOBILE UK LIMITED	Companies – Petition – Winding Up Petition	BAC – 6170/2014	03-09-2014
CR-2015-002063	LYCAMOBILE UK LIMITED	Companies – Petition – Winding Up Petition	BAC – 130/2015	16-02-2015
CR-2015-005598	Lycamobile UK Limited	Companies – Petition – Winding Up Petition	BAC – 5722/2015	02-09-2015
CR-2015-005723	Lycamobile UK Limited	Companies – Petition – Winding Up Petition	BAC – 4865/2015	16-07-2015
CR-2016-006412	Lycamobile UK Ltd	Companies – Petition – Winding Up Petition		07-10-2016
CR-2017-003088	LYCAMOBILE UK LIMITED	Companies – Petition – Winding Up Petition		20-04-2017
CR-2017-007288	LYCAMOBILE UK LIMITED	Companies – Petition – Winding Up Petition		02-10-2017
CR-2020-001884	Lycamobile UK Limited	Companies – Petition – Winding Up Petition		16-03-2020
CR-2020-002227	Lycamobile UK Limited	Companies – Petition – Winding Up Petition		17-04-2020
CR-2023-006359	Lycamobile Europe Limited	Companies – Petition – Winding Up Petition		14-11-2023
CR-2024-004816	Lycamobile UK Limited	Companies – Petition – Winding Up Petition		12-08-2024

What is a Winding-Up Petition?

A winding-up petition is a formal legal process initiated by creditors to force a company into liquidation when it fails to settle its debts. This drastic measure is often used as a last resort after other attempts to recover the owed amounts have failed. In Lycamobile’s case, the petition by HMRC is aimed at recovering unpaid VAT, which has been a major point of contention between the tax authority and the telecom operator.

Background of the Tax Dispute

HMRC recently won the Tax Tribunal VAT appeal in Lycamobile UK Limited v The Commissioners for HMRC [2024] UKFTT 638 (TC) resulting in a £51m VAT liability for Lyca. The petiton debt stems from a longstanding VAT issue related to the treatment of customer “bundles” sold by Lycamobile over approximately eight years. The recent ruling by a tax tribunal sided with HMRC, confirming that Lycamobile owes £51 million in VAT. This amount, combined with previous financial difficulties, has led to Lycamobile’s current predicament.

Despite generating revenues of over £145 million in 2022, the company has struggled financially, with late filings and significant audit issues. The company reported a loss of £24 million for the year ending December 2022, compared to an £8 million profit the previous year. Additionally, auditors PKF Littlejohn have expressed concerns about the company’s financial statements, citing insufficient evidence to provide a clean audit opinion.

Lycamobile Loses Tax Tribunal VAT Dispute

On 18 July 2024, Lycamobile UK Ltd was ordered to pay VAT on the full value of its mobile phone plan bundles at the time of purchase, rather than when the included services were used.

The company argued that VAT should only be applied to the portion of the bundle actually consumed by customers. However, the First-tier Tax Tribunal (FTT) ruled that the entire bundle constituted a single supply of telecommunication services, subject to VAT at the point of sale.

This decision aligns with previous rulings in Card Protection Plan Ltd v HMRC and Purple Parking Ltd v HMRC. In Card Protection Plan, the European Court of Justice (ECJ) was asked to determine whether a card protection plan constituted a single supply or multiple supplies for VAT purposes. The ECJ ruled that the card protection plan was a single supply of insurance, even though it included various services such as loss or theft protection, legal assistance, and purchase protection. This case established the principle that a bundle of services can be considered a single supply for VAT purposes if they are closely linked and form an integral part of a single overall transaction. In Purple Parking, the ECJ was asked to determine whether a parking permit that allowed customers to park in multiple car parks constituted a single supply or multiple supplies for VAT purposes. The ECJ ruled that the parking permit was a single supply of parking services, even though it allowed customers to park in different locations. This case further reinforced the principle established in Card Protection Plan that a bundle of services can be considered a single supply if they are closely linked and form an integral part of a single overall transaction. In both cases, the ECJ emphasised the need to look at the economic reality of the transaction to determine the nature of the supply. These rulings have had significant implications for VAT treatment of bundled products and services.

Lycamobile UK Ltd Tax Tribunal Appeal Decision

In Lycamobile UK Limited v The Commissioners for HMRC [2024] UKFTT 638 (TC) suffered a defeat in its VAT appeal. The UK Tax Tribunal has issued a decision in principle that has lead to a substantial VAT liability for the mobile phone operator.

The case centered on the correct VAT treatment of Lycamobile’s mobile phone plan bundles. These bundles typically comprised a package of call minutes, text messages, and data allowances. Lycamobile had argued that VAT should be charged only on the portion of the bundle that was actually used by customers.

However, the Tribunal ruled against Lycamobile, determining that the supply of the entire plan bundle constituted a single, taxable supply of telecommunication services. This means that VAT should have been charged on the full value of the bundle at the point of sale, rather than on a pro-rata basis based on usage.

The First Tier Tribunal’s decision has had far-reaching implications for Lycamobile. Not only is the company now facing a substantial VAT assessment, but also tax penalties and interest will have been applied for the underpaid tax. The key legal points arising from the case are:

• The nature of a supply for VAT purposes is determined by the overall economic reality of the transaction.
• The time of supply for VAT is generally when the supply is made available to the customer and consideration is paid.
• Vouchers are subject to specific VAT rules, but the Tribunal found that the mobile phone plan bundles in this case did not constitute vouchers.

Appealing the FTT Decision to Delay the Petition?

The Company may well consider appealing the FTT tribunal’s decision in order to stay alive by delaying the petition. While the tribunal’s judgment is binding in this case, the company has the right to challenge the decision in a higher tribunal, namely the Upper-Tier Tax Tribunal (UTT). Lycamobile would need to demonstrate that the tribunal made an error of law in reaching its decision. Potential grounds for appeal could include:

• Abuse of discretion: The appellant might argue that the tribunal exceeded its powers or acted unfairly.
• Incorrect interpretation of VAT law: Lycamobile might argue that the tribunal misinterpreted the relevant VAT legislation.
• Error of fact: The company could claim that the tribunal made a factual error in its findings.

The decision to appeal may be strategic in which case the petition might be stayed pending appeal to the UTT. Lycamobile will need to weigh the potential costs and benefits of an appeal against the risk of an unsuccessful outcome. Factors to consider include the potential financial impact of the tribunal’s decision, the strength of the grounds for appeal, and the likelihood of success as well as the impact of the ongoing petition which once advertised will due to s127 Insolvency Act 1986 mean Lycamobile will need a court validation order to continue trading. Given the state of its accounts that may be an uphill challenge.

Financial Troubles and Legal Issues

Lycamobile’s long list of legal battles and financial woes extend well beyond the UK. In France, the company’s French subsidiaries were recently fined €10 million for VAT fraud and money laundering and the CEO Chis Tooley was jailed. Lycamobile’s troubles have been compounded by a recent malware attack, further impacting its operations and customer service. The company has faced criticism for its financial management and operational practices, which have been under scrutiny for several years.

The winding-up petition against Lycamobile underscores the severe implications of unresolved tax disputes and financial mismanagement. As Lycamobile navigates these challenges, it serves as a critical reminder of the importance of effective legal and financial oversight for businesses. If you are facing similar issues or need legal assistance with winding-up petitions, do not hesitate to reach out to us for expert advice and representation.

Update: Lycamobile Spokesperson’s Comments

A spokesperson for Lycamobile has reportedly told City A.M. that:

“We confirm that the winding-up petition issued by HMRC against Lycamobile UK Limited on Monday 12 August related to amounts that were already paid by Lycamobile UK Limited or under dispute and it appears that the petition was issued in error. HMRC has acknowledged that these amounts, less the disputed sums, were in fact already paid. The matter is not related to the recent HMRC tribunal ruling on VAT which will be subject to appeal. HMRC have indicated that the winding up petition against Lycamobile UK Limited will be withdrawn. We will continue to work closely with HMRC to swiftly conclude the matter.”

The operative key words here, in a comment that was almost certainly drafted with legal advice, are “or under dispute” i.e. whilst the statement reads as if there is no debt to HMRC it is actually leaving open the possibility that the entire debt may be under dispute. That dispute could for example be by way of Tax Tribunal Appeals. HMRC do not usually comment on taxpayer matters so are unlikely to offer any clarity. If HMRC do agree to withdrawal or dismissal of the petition because of error which is not impossible but is rare, then HMRC should pay legal costs of and occasioned by the petition – one of our clients recently achieved such an outcome on an abusive HMRC Petition which was dismissed with costs against HMRC.

Elite Legal Representation in HMRC Petition Defence

If your company is facing a winding-up petition or similar legal challenges, our experienced solicitor and barrister legal team is here to assist. We offer comprehensive services for both issuing and defending winding-up petitions, ensuring that your interests are protected throughout the legal process. Whether you’re dealing with tax disputes, financial difficulties, or other corporate challenges, our elite lawyers can strategically guide legal proceedings. We specialise in litigation, providing tailored solutions to meet client need.

We guide our clients through the minefield of complex winding-up rules and procedure and manage the entire process. We have years of experience in negotiating with HMRC petitions as well as creditor, shareholder or director petitioners. We regularly represent our client companies in the Companies Court and successfully obtain adjournments (i.e. to allow time to negotiate and settle or to defend a winding up petition) and injunctive relief even against HMRC. We can help companies avoid having bank accounts frozen by preventing advertisement of winding up petition notices or (if already advertised in the London Gazette) by obtaining a validation order from the Court to unfreeze the company’s bank accounts. We have a proven track record of fighting for our clients and we know exactly how to get the best results for your business.