3G operators open up a VAT of controversy

Can m'learned friends help Britain's third-generation mobile licence holders to claw back some of the £22.5bn they blew during the auction of 2000?

A multibillion-pound court case between the British government and the five mobile phone companies that hold UK third-generation network licences began on Monday.

Vodafone, Orange, O2, T-Mobile and Hutchison 3G all claim that they should be repaid £3.35bn of the £22.5bn that they spend acquiring their licences in the 3G auction of 2000.

The five operators' case against the UK government is taking place before a VAT tribunal in London. They claim that the prices they paid for their licences included VAT, or value-added tax, which as companies they should not pay and ought to be able to reclaim.

The government, though, has repeatedly denied that this is the case. It insists that it auctioned off the 3G licences in its capacity as a public body, which means no VAT was levied. Ergo, the £22.5bn bill did not include a 17.5 percent VAT levy.

Some industry observers believe that the mobile operators' case is just a desperate attempt to claw back some of their spending on 3G licences. Many European countries auctioned off radio spectrum for third-generation services in 2000, shortly before the bursting of the dot-com bubble escalated into a full blown tech-sector crash.

With hindsight, analysts generally agree that the prices paid for 3G licences were excessive, in some cases wildly so.

The mobile firms, though, insist they have a genuine grievance. They have been heartened by a decision made by the English High Court in December 2001, when it ruled that the auction was conducted in a "commercial capacity", and that its aim was "to maximise the revenues of the state".

This ruling is seen as being key to the mobile phone companies' chances of success.