VAT refund Illegal Orange trick?

I was unhappy with Orange hijacking my vat refund into a phone fund and I sent this to Orange:-

Query: When I top up, I do NOT want the £1 to go in a new phone fund. I have no intention of buying a new phone and I want the vat adjustment of 25p added to my credits as before.
Please confirm you can do this?

They replied:

Thank you for your mail regarding Phone Fund.

I am sorry to learn you are unhappy with the Phone Fund offer.

Following the VAT changes announced by the government in December 2008 we amended our charges so that for every £10 a customer tops up they got an additional 25p credit.

We have been listening to our customers and know that in these difficult times every penny helps.

In line with this we are now going to offer four times as much benefit to our customers by launching Phone Fund. Rather than a 25p credit when they top up by £10, customers will now get £1 when they top up by £10 which they can use against the cost of a new handset.

I can confirm that prices are not being raised, you still get everything you got before the VAT changes plus an extra £1 into a phone fund so you are getting more than ever before.

Your Phone fund builds up over a rolling 12 months with each top-up, until you decide to buy a new phone. You can get a new phone by calling 450 , visiting our orange.co.uk website or going to an Orange shop to cash in your fund towards the cost of a new phone. You can have a maximum of £200 in your phone fund at any one time.

May I confirm that Phone Fund balance can be checked by sending a text message saying ‘Phone’ to 450, calling or checking via Your Account on orange.co.uk or Orange World.

For further assistance please call 450 from your Orange handset or 07973 100 450 from a landline where one of our representatives will be pleased to help you.

For further information on terms and conditions please visit the link below:

http://www1.orange.co.uk/phonefund/

I trust my response is of assistance to you and apologise it is not possible to assist you further by email.

Kind regards

My question here is are they acting legally? Apparently if the money in the phone fund just disappears after a year if you haven't bought a new phone! In my opinion they are using the vat reduction as an excuse to push their phones or alternatively nick the cash!