AOL Under Attack Over VAT

by Jason Gorringe, Tax-News.com, London

01 August 2001

Internet service provider AOL has been the subject of controversy this week after a report released by Merrill Lynch revealed that it was taking advantage of a 'loophole' in UK tax laws in order to avoid charging its customers VAT. Freeserve, one of the other front runners has been up in arms, and has called on Chancellor Gordon Brown and the Customs and Excise Department to change AOL's tax status. 'By not charging VAT on its flat rate internet package, this division of America Online wields a powerful competitive advantage over UK internet service providers,' a Freeserve spokesman explained.

AOL's advantage comes from the fact that it is registered for taxation purposes in the United States, and can avoid VAT under the 1997 Customs and Excise ruling which states that non-UK ISPs are exempt from VAT because they supply content rather than telecoms services. However, Freeserve alleges that the latter is exactly what AOL is supplying, and that as such the organisation should be eligible to pay value added tax in the United Kingdom.

However, AOL have hit back against the allegations, saying that they are not doing anything wrong: 'In keeping with the ruling of the UK tax authorities,' said a spokeswoman, 'AOL is treated as a provider of information services from outside the European Union, a status available to any other similarly positioned provider.'

According to the Merrill Lynch report, for every 100,000 flat rate customers, AOL earns an extra £2.6 million by not charging VAT. Freeserve CEO John Pluthero estimates that this gives the provider a tax advantage of at least £26 million a year over its UK rivals.

By contrast, Freeserve's charge of £12.99 includes VAT at a rate of 17.5%. Mr Pluthero has said that although he does not want to move the Freeserve servers outside the UK, he may be forced to do so in order to avoid the 17.5% extra in tax.

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