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.