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VAT and NGN services

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What will the VAT rise mean to non-geographic phone calls in this country? Nick Dixon, Core Telecom’s Commercial Director looks at the future for 08 and 09 numbers.
The recent three changes in the level of VAT paid in this country has forced OFCOM into the unprecedented action of making a fundamental change in the way pricing for phone calls is governed, and can be utilised, and could have a major impact in the need for new number ranges across the board.

For 17 years the level of VAT paid in the UK remained at 17.5% and all seemed happy with the world. A the height of recession Gordon Brown and the Labour Government’s decision to alter the level of VAT to 15% left the telecoms world largely unaltered. The extra 2.5% that would otherwise have been garnered towards the Government purse, now was supposed to be filtered into the market to eschew confidence and increase public spending. Of course that never happened. The public spent as they normally spent and the companies at the top of the tree who were supposed to filter the monies down the supply chain, rang the cash bells and deposited the extra 2.5% in their own bank accounts.

Such halcyon days, though, tend not to last long and the country was back paying 17.5% tax on anything that the Government deemed fair. A few CEOs of major telecoms companies wiped a tear or two away and got back to living in the way we had all lived for the previous 17 years.

Then came along Mr Cameron and the Coalition Government who found that the Treasury and pretty much anything else that relied on Public funding, was flat broke. Not only were the Government offices going to have to function without the decoration of cut flowers, but, more importantly, we were somehow going to have to do something, as a Country, to actually cut the ridiculous level of debt Gordon and the boys had got us into.

After a period of head scratching and tough talking the emergency budget eventually came to the conclusion that this old VAT vehicle, could probably be utilised more effectively to put money into Public coffers, rather than, as the TV ad goes, ‘for the bubbly at the shareholders AGM’. The momentous decision to charge VAT at the highest rate in UK history (except when petrol was taxed at 25% between 1974 and 1976) was made and 20% VAT from 2011 was introduced.

For telecoms some may consider that this shouldn’t have an impact. When it changed from 17.5% there was no impact on anyone and when differing levels of BT bad debt levies over the year varied this still had no impact on how pricing was done. But this was different. There was certainly no way that the big boys sitting at the top of the tree were going to swallow a 2.5% reduction in profit. No. This burden was one to be shared down the supply chain. So with the person at the bottom, usually the one to take the hit the companies who were going to be affected decided to rally and call upon OFCOM to change the rules so margins could remain as they currently are.

It was fairly argued, to be honest, that during a period when the country is going through an age of austerity, it is more important to keep people working and adding to the Public coffers, than draining it more through having to claim benefits.

So OFCOM were left with a decision. Do you increase the top rates that telecoms companies could charge customers, or fundamentally change how all the pricing in the UK currently works. The balances were one of ‘do you keep the rates consumer pay clear, easy and understandable?’, or make it highly confusing so consumers haven’t really got a clue what they are paying for what. Obviously the regulator, fearful of making a decision that was seen to be too drastic, decided on the latter.

So, where does that leave the telecoms arena for non-geographic numbers?

Currently there are bands of numbers and ranges specifically created for them;

  • 1p to 5p inclusive use 0844 and 0843
  • 6p to 10p inclusive use 0871 and 10p to £1.50 per minute use 090 premium rate numbers.

OFCOMs decision was not to change the bands, but to set the maximum levels of pre-VAT figures for each. Confused? Well it gets better. If, as a UK business, you use a 5p 0844 number, like Sky, then that is currently made up of 4.26p + 17.5% VAT. The figures set by OFCOM fix the 4.26p amount for consistency, and allow the Government to move the VAT figure as they please without affecting profit margins down the supply chain.

So, moving through the ranges the maximum figures become;

  • On 0844 the maximum amount will be 4.26p +VAT, equating to 5.11p
  • On 0871 the maximum amount will be 8.51p + VAT, equating to 10.21p
  • On 09 the maximum amount will be 127p +VAT, equating to 152.4p

In essence, as a formula, and for the industry, it could be argued that this is an acceptable status quo, but for an increasingly wary British public these sorts of strange pricing levels must surely look a little confusing. When no pricing is actually needed on 0844 the argument is that the public don’t know what they are paying anyway, so the issue looks more likely to affect a Premium Rate industry still struggling to cope with the fallout from the TV scandals of 2007 and 2008.

My personal opinion is that, prior to making the decision on when to change VAT, David Cameron had to consult Simon Cowell to ask him when The X Factor was going to finish. (Just before Christmas I believe). Currently votes cost 35p and the hordes of Matt Cardle and One Direction fans can associate with taking a 20p, a 10p and a 5p coin out of their pocket and voting like that. However paying 35.744681p for the pleasure may confuse.

David probably hoped that by the time the X Factor was on again everyone would be used to paying for services at random looking price points.

The alternative is that Network Operators in the UK will go back to OFCOM and go looking for new price points where the inc VAT price for the consumer is still a clear and round figure. At which point, no doubt, OFCOM will complain that we are out of numbers to use, and that everyone should consult over new ranges of numbers that could be used, perhaps even returning to the old argument about charging networks for number range ownership. I’m sure OFCOM haven’t made such a Machiavellian decision…

Because if one thing is for sure in all this, then there will be many more X Factors before the country is set to have paid off our debt and return to 17.5%.

And that is if we ever do.