Freeserve begins judicial review against UK Customs & Excise

AOL is the only UK ISP that benefits from this exemption. By avoiding the obligation to charge VAT, Freeserve has long pointed out that AOL has an unfair advantage over its competitors in setting prices and has been able to channel the revenue saved into promotions and advertising.

Freeserve claims that AOL has, as a result, substantially increased its market share in the UK “over and above what it would otherwise have been.” AOL has always argued that it is doing nothing wrong.

In January 2002, AOL, a service of AOL Time Warner, claimed 1.5 million members in the UK. On these figures, AOL saves around £40 million a year in unpaid VAT.

Freeserve also argues that Customs’ current VAT policy threatens a level and competitive playing field for the provision of Digital Subscriber Line (a form of broadband internet access) services in the UK. The economic stakes and advantages AOL enjoys by not accounting for VAT in the UK are raised even higher with DSL, the cost of which will substantially reduce on 1st April when BT’s wholesale prices will drop significantly, opening the door to reduced prices by resellers such as Freeserve. From that date, Freeserve will offer broadband internet access for £29.99 a month, some £4.50 of which will be paid in VAT.

BT is forecasting one million UK broadband consumers after one year. At similar retail prices to Freeserve, the value of this market to the UK Treasury would be approximately £54 million.

Customs and Excise said at a meeting with Freeserve in August 2001 that it would look very closely at the issues raised by Freeserve and that if a change of policy was decided upon, this decision would be taken “very quickly indeed.” Customs cited the end of September 2001 as a date by which a decision could be made.

Freeserve says it has made regular contact with Customs “in order to try to find out what has been going on and when a decision would be made, but Customs’ assurances that a decision is imminent have not been fulfilled.” Freeserve also wrote to Treasury Minister Paul Boateng MP and one month later, on December 14, was informed by the Minister that Customs’ review of the situation was nearing completion and that he hoped to take decisions in a matter of weeks.

Freeserve says that it is aware that Customs eventually submitted its report to Ministers to enable the government to make a decision as to whether existing Customs policy should be changed on 28th January 2002. Ministers have two weeks from the date on which reports of this nature are submitted, in which to consider the issues and then issue a decision. Accordingly, a decision should have been made by 11th February 2002. To date, no decision has been made.

Freeserve said in its statement issued today:

“Despite Freeserve’s efforts to lead Customs to act in accordance with EU law, Customs has failed to do so. Promised deadlines for a decision have come and gone and, in the meantime, AOL has continued to enjoy an illegitimate competitive advantage. Freeserve has been patient and sought to resolve this matter through amicable dialogue over an extended period of time. Regrettably, a decision has yet to be made and no firm date for a decision has been given. In those circumstances, Freeserve has decided to take more concrete action.”

John Pluthero, Chief Executive Officer of Freeserve, 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.

“You really have to wonder what it is AOL have over this government. The Treasury will have allowed over £100m to slip through its fingers. If we or BT can’t get to the bottom of it, then let’s see if the High Court can’t provide some answers.”