Madeira is a region of Portugal, which, although it enjoys a great deal of autonomy, pays its taxes to Lisbon. However, because of the cost of importing goods onto the Island, it is allowed to levy a lower (13%) level of VAT.

This has made it extremely attractive to ISPs such as Virgin.net and Freeserve, as under the single registration clause of the EU directive, companies are allowed to pay the combined tax liability that they have accumulated throughout the EU in one member state, at that country's VAT rate.

In proposals released last week, the EC observed that:

'Recent experience has shown that the current derogations can give rise to abuse: for example, there have been cases of businesses in the e-commerce and telecommunications sectors moving to the Azores and Madeira in order to apply the lower rates (of VAT) applicable there to services they supply to final consumers throughout the community.'

It continued: 'Steps must be taken to put a swift end to such practices as they are a misuse of the derogations which were granted solely to allow the member states concerned to take account of the remoteness and special geographical situation of those regions.'

Speaking to The Register news service with regard to the EC's proposals, however, a Freeserve spokeswoman suggested that the company was not greatly concerned, as 'the current situation isn't likely to change for years to come'.