HM Customs & Excise has issued a clarifying note on the tax
treatment of ISPs in the UK. It follows the launch by Freeserve
earlier this month of judicial review proceedings. Freeserve argues
that current rules give AOL, its biggest rival, an unfair
competitive advantage. By being US-based, AOL is currently exempt
from having to account for Value Added Tax which, according to
Freeserve, saves AOL around £30 million each year.
HM Customs indicates in its Business Brief of 14th March 2002
that it largely agrees with the concerns expressed by Freeserve;
but points out that new rules will come into force on 1st July 2003
which will redress the situation – and that nothing will change in
the interim.
According to HM Customs’ Business Brief:
"A lasting, fair and clear approach, whereby
all internet service packages supplied by UK and non-EC ISPs are
taxed in a similar way can only, in Customs' view, be successfully
achieved through material changes to the relevant EC VAT rules.
Such changes are now in prospect through the terms of the VAT and
e-commerce Directive (to be formally adopted shortly).
"This Directive further amends the EC place
of supply rules for services so as to establish an additional
category of services (including digitalised products, and so
content provision) which are subject to VAT not by reference to the
location of the supplier but by reference to the location,
ordinarily, of the consumer.
"As a consequence of these changes, with
effect from 1 July 2003, all internet service packages will be
subject to tax in the EC irrespective of the location of the
supplier and/or the balance between the constituent elements of the
package. Thus non-EC ISPs will be required to account for VAT on
their services.
"Customs see these forthcoming EC changes as
providing an essential foundation of legal certainty as to the
treatment of internet service packages, and so as the best means of
achieving consistency of treatment as between different ISPs and
differing packages. In the interim, therefore, the current
treatment […] will continue."
Freeserve has previously acknowledged that the new European law
will change the tax position – but it called upon the UK Government
to implement the changes long before July 2003. The company has not
yet responded to the Business Brief.
