Freeserve, controlled by France Telecom, is the UK's largest ISP with an estimated 2.5 million customers and plans to use a Madeira-based subsidiary to operate its AnyTime unmetered internet access service. Freeserve reckons to save around £4.5 million in tax from the move. Freeserve’s separate broadband and pay-as-you-go services will not, however, relocate under the reorganisation.

British Telecom announced in April that it was planning to move its broadband internet division BTopenworld to Madeira, where it will join Virgin.net, a new flat-rate internet service which is a joint venture between the Virgin Group and cable provider NTL, and which has established its financial base in Madeira.

Freeserve joined BTopenworld earlier this year in launching an unsuccessful judicial review of Customs & Excise's decision to allow AOL's exemption. John Pluthero, chief executive of Freeserve, has long campaigned for a level playing field and estimates that the exemption saves AOL about UK£40m a year - equivalent, he says, to a subsidy of £4.50 per customer per month on its high-speed broadband internet service.

AOL's exemption is likely to remain in place until 2003, when the introduction of the European Union's directive on e-commerce will mean that non-European companies selling online services within the EU must pay VAT.

However, a spokeswoman for America Online explains that prices are unlikely to rise even then: 'Currently, our broadband product isn't VAT-able because AOL is based outside the EU. We expect we will have to pay VAT once the EU directive comes into force next year, but we have no plans to raise the price at this stage.'