The US-based ISP was targeted by British rival Freeserve, which claims it was unaware until recently that its main rival was exploiting this loophole. A report from Merrill Lynch, which said that every 100,000 flat rate customers AOL earns £2.6m a year by not charging VAT, exposed the anomaly.
Today the company threatened to move abroad to Morocco or Algeria if the government does not change the law. It said the VAT rules are unfair and deprive the treasury millions of pounds a year in VAT.
The exemption arises because, according to an EU directive, AOL is not classified as a telecom service company. The US company, which boasts the highest usage of any ISP in the US, received clearance from Customs & Excise that it is exempt from paying VAT in the UK as its servers are based in the US.
In a statement in the Guardian, AOL defended its position claiming it had complied fully with UK tax law.
‘In the UK, AOL is subject to the relevant tax authorities who, since the launch of the AOL service in the UK in 1996, have recognized that the hub of AOL’s global network is based in the US,’ the statement said.
‘In keeping with the ruling of UK tax authorities, AOL is treated as a provider of information services from outside the European Union, a status available to any other similarly positioned service provider.’
Head of taxation at ACCA, Chas Roy Chowdhury, said the exemption highlighted the need to sort out EU policy on e-commerce taxation, which would affect other member states too.
‘This will encourage European companies, especially in places as Scandinavia where VAT is high, to move out of Europe,’ he said.
‘The European Union has not addressed the issues and has yet to come to terms with e-commerce.’
AccountancyAge.com reported earlier this month on efforts to solve another area of the European e-commerce tax conundrum. Currently suppliers of downloadable electronic goods from outside the EU pay no VAT on their sales while domestic traders must comply with tax law.
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