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Freeserve and BT to challenge rival's tax exemption

Stephen Foley
Monday 11 March 2002 01:00 GMT
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BT and Freeserve have joined forces in a legal challenge to a tax exemption which allows their rival, AOL, to avoid paying VAT on its internet access services.

Btopenworld, the broadband internet business of BT Group, is urging the Government to change the rules, which it says will give AOL a competitive advantage in the coming push to attract broadband customers.

It will present its case in a letter to the Treasury within the next few weeks, arguing in favour of a level playing field. It is also expected to support Freeserve in its application for a judicial review of the tax exemption, which dates back to a Customs and Excise decision nearly five years ago.

Because AOL's internet package included content, through the company's web portal, as well as metered internet access, the group should not be taxed as a telecoms service provider, Customs decided in October 1997. That meant the US firm's sales did not have to be taxed in the jurisdiction where the services were "effectively used and enjoyed", and it could avoid the UK's sales tax.

Freeserve, owned by Wanadoo of France, has been waging a campaign against the judgment since 2000, saying the provisions are now out of date and iniquitous. On Friday, it filed for a judicial review from the High Court on Friday, which it hopes will lead to a VAT bill for AOL, backdated to August 2000.

Paul Barker, Freeserve spokesman, said: "We suspect that in 1997, Customs just didn't know how to categorise AOL, but it is very clear that it is now a provider of unmetered internet access, and that is a telecoms service."

Freeserve estimates that AOL saves £40m a year because of the exemption. And Mr Barker suggested the question mark over the future of its tax-exempt status lay behind AOL's reluctance to set out a new price package for broadband internet access. Most other internet service providers have done so in the wake of BT's decision to slash wholesale charges.

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