Freeserve Applies For Judicial Review Of AOL's VAT Exemption

by Jason Gorringe, Tax-News.com, London

11 March 2002

Btopenworld, the broadband internet business of BT Group, has joined forces with UK Internet Service Provider Freeserve in its legal challenge to a tax exemption which allows their rival, AOL, to avoid paying VAT on its internet access services.

The cause of the long-running dispute is the fact that AOL is registered in the United States for tax purposes, and is therefore exempt from charging VAT under a 1997 Customs and Excise ruling, which states that non-UK ISPs do not have to pay because they supply content rather than telecommunications services. 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owned by Wanadoo of France, has been waging a campaign against the judgment since 2000, saying the provisions are now out of date and iniquitous.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.

Freeserve estimates that AOL saves UKP40m a year because of the exemption, and this figure will increase as more costly broadband access is taken up more widely. AOL has yet to announce the price of its broadband package despite a major price cut by BTopenworld two weeks ago, and BT says this is because AOL itself is fearful of losing its VAT privilege, which could mean that competitive pricing would backfire on it.

BTopenworld 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.

John Pluthero, Freeserve Chief Executive, said he expected the judicial review to be heard in about a month's time: "The UK Government has been fobbing off Freeserve and BT for over a year on this issue. It's time for the evasion to stop and the litigating to begin."

Pluthero says he hopes that the new European directive imposing VAT on digital sales by non-EU suppliers, set to come into force in 2003, will achieve what the UK Customs and Excise department has been unable (or unwilling) to. But this is a separate issue: if AOL's sales are exempt now, they will be exempt in the future unless the law is changed.

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