Freeserve to sue UK government as AOL tax fight heats up

Freeserve is taking UK Customs and Excise to the High Court, claiming a 1997 ruling which exempts AOL from paying VAT in the UK is in breach of European law.

Freeserve applied to the High Court for a judicial review of the tax exemption on Friday, alleging Customs and Excise and the Treasury had failed to take any action, despite a long-running dialogue between the three parties.

The tax exemption also affects Freeserve competitor BTopenworld.

A spokesman for BTopenworld said that while it is not involved in Freeserve's legal action, it does have similar concerns.

BTopenworld has also approached the Treasury on several occasions.

The spokesman said: "We have contacted the Treasury with our concerns and we will be contacting them again. We have spoken to them more than once, it's an ongoing issue."

Freeserve's legal action hinges on a 1997 Customs and Excise ruling which deemed AOL exempt from UK VAT bills because the company regards itself as a content provider and not a telecommunications services company.

However, a subsequent 1999 EU directive ruled that all internet companies, including those providing access to content, should pay VAT. European governments were given a deadline of July 2002 to implement that directive.

Freeserve argues that AOL saves £40m a year in unpaid VAT, allowing it to put more money into promotion, and gain a larger audience share.

Competition is set to heat up as the ISPs battle to win broadband customers. From 1 April Freeserve will offer customers broadband access for £29.99 a month. But the company claims it will pay monthly VAT costs of £4.50 for each customer.

BT expects to have one million broadband customers within the next year, paying similar retail prices to Freeserve customers. It estimates it will pay the Treasury £54m in VAT.

In a statement issued today, Freeserve CEO John Pluthero said: "The UK government has been fobbing off Freeserve and BT for over a year on this issue, promising a decision is imminent each time we speak to them. It's time for the evasion to stop and the litigating to begin."

Btopenworld agrees. The spokesman added: "Our feeling is it would be better for the government to act on this sooner rather than later," he said.