UK mobile operators seeking billions of pounds in tax rebates on their 3G licences will have their case heard before the European Court of Justice in Luxembourg.

The operators claim that the cost of the 3G licences included VAT, and that they should be able to reclaim that money from the government.

In total, the operators spent £22.5bn on the 3G licences. If this figure is ruled to have included VAT, the rebate will be worth £3.35bn. This is a tidy sum, no doubt, and would be most welcome in an industry still trying to work out exactly how to make these licenses pay.

The case hinges on whether or not the UK government is deemed to have been engaged in "economic activity" when it licensed the spectrum; and this in turn depends on the definition of the word "telecoms", the Financial Times reports.

The case was originally put to Britain's VAT tribunal last year, but has been referred to the higher court for clarification over whether the auction of the 3G licences should be defined as telecoms activity.

Under the European VAT directive, public authorities, such as the government, are not normally defined as carrying out economic activity. The government argues that this means VAT was not paid on the licences.

However, elsewhere, the directive states that a government can be defined as engaging in economic activity if this activity relates to certain specific industry sectors: one sector is the telecoms business.

According to Paddy Behan, a VAT specialist at accountancy firm Grant Thornton, the meaning of the word telecommunications could decide the case. He told the FT: "If the operators' definition is accepted by the court, it is hard to see how they could lose." ®

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