BT is threatening to move its internet service provider business overseas in the latest move in its campaign against a tax loophole that is saving rival AOL an estimated £40m a year.
The company's internet arm BTopenworld said it would consider moving its business to Madeira where VAT levels are lower than those in the UK.
Under existing law, AOL is exempt from having to pay VAT in the UK because it is an American company and classified as a content provider, not a telecoms business. However, recent European Union and UK government rulings mean it will have to register its business in an EU state by July of next year and start paying VAT.
"Should AOL seek to register for VAT in a comparatively favourable jurisdiction such as Madeira then clearly other UK ISPs would have to look at their own arrangements to see if such imbalance could be redressed by similar treatment," said Alison Ritchie, the chief executive of BTopenworld.
In a letter to Paul Boateng, the financial secretary to the Treasury, she demanded a "better explanation" of the VAT discrepancy, saying the rules give a significant competitive advantage to non-EU players.
A BTopenworld spokesman said: "We don't want to see AOL enjoy exemption until July and then start operating from Madeira and charging lower rates than other ISPs."
AOL has been exempt from paying VAT in the UK thanks to a decision from Customs and Excise. It decided internet companies based outside the EU could be treated as content providers and not charged the VAT levied on telecoms services businesses – a category BTopenworld falls under.
John Pluthero, the chief executive of Freeserve, the ISP owned by Wanadoo of France, has long campaigned for a level playing field and has also said that he would consider moving Freeserve's business outside the UK to benefit from the same treatment. He is seeking a judicial review of the rules and to force AOL to make back-dated tax payments.
BTopenworld and Freeserve estimate that the exemption saves AOL about £40m a year – tantamount, they say, to a subsidy of £4.50 per customer per month on its high-speed broadband internet service.
Ms Ritchie told Mr Boateng: "Given typical broadband margins, this is a huge sum that could enable AOL to become the dominant retail provider of broadband access.
"It is clearly perverse for the Government to prevent a genuinely competitive market at this important juncture, particularly when the advantage is being given to a US-based company," she said.
BT, which is chaired by Sir Christopher Bland, recently slashed the price of its wholesale internet product in a move designed to kickstart the uptake of broadband in the UK. It is targeting 1 million connections for the service by 2003.