Winning start for Freeserve in VAT fight

Link: Freeserve takes on Customs VAT rule

In London’s High Court, Mr Justice Moses ruled that Freeserve’s challenge of the Customs and Excise decision in March not to charge AOL VAT on its internet packages was ‘arguable’. The case will now go ahead to a full judicial review hearing, a date for which has yet to be set.

The row between the two leading UK ISPs over AOL’s current VAT-free status in Britain for its internet services has been rumbling on for over 18 months. Freeserve argued last July that by not paying VAT, AOL had an unfair advantage over UK-based ISPs, and called it a ‘distortion of competition’.

Following legal advice, Freeserve argued that AOL should no longer be using a C&E guideline to avoid paying VAT on its UK ISP service. The 1997 guideline exempts non-European ISPs from UK VAT, providing its supplies are classed as mainly content, not telecommunications. Freeserve claimed US-based AOL can no longer classify itself as mainly a content provider. It cited AOL’s own marketing, pointing out that its website says it is mainly a telecommunications service.

Freeserve also claimed that a more recent European law forbade companies from circumnavigating VAT laws by artificially splitting a service. However, C&E Commissioners in March said they ‘could not be certain’ that AOL fell into that category and ruled in its favour. In retaliation, Freeserve upped sticks and moved its flagship ‘Anytime’ service to Madeira, where VAT is charged at only 13.5%. It has subsequently said that this is now a ‘permanent’ move.

In court today, Freeserve’s counsel, David Pannick QC resurrected this argument and said AOL should be charged VAT if its business in the UK ‘predominantly’ consisted of ‘telecommunication services’.

Although an expected change to European law, due to take place in July 2003, would rescind AOL’s VAT-free status, Mr Pannick said AOL would still have escaped paying an estimated £100m in VAT on its internet packages between June 2001 and July 2003.

Roderick Cordara QC, for AOL, described Freeserve as a ‘disgruntledcompetitor’ who had no business ‘prying’ into the US giant’s confidentialdealings with Customs and Excise.

Nevertheless, Justice Moses said it was possible the Commissioners had placed an erroneous reliance on the projected change in the law, which would make AOL ‘unequivocally’ subject to VAT. He also said Freeserve could make an argument that the Commissioners had applied ‘too stringent a test’ when deciding whether AOL’s UK business was predominantly telecommunications based.

AOL was contacted, but said no one was available to comment at time of going to press.