Freeserve loses judicial review against Customs and Excise

The case arose from a loophole in UK tax law, which allowed an internet content service provider based outside the UK – such as AOL – not to pay VAT, while telecommunications providers were obliged to pay the tax.

Freeserve argued that the decision by Customs and Excise not to charge VAT had given AOL an unfair advantage in the UK market, amounting to an estimated £40 million a year. The ISP took judicial review proceedings against the government department last year.

On Friday the High Court dismissed the action, and refused to give leave to Freeserve to appeal. The long-running battle is now at an end, and Freeserve is left with the bill – estimated to be around £500,000.

According to news site TheRegister.com, Freeserve said in a statement:

"We are disappointed with the verdict but we are pleased that since 1 July 2003 AOL is in line with all other ISPs and has been paying VAT so that the level playing field we fought long and hard for has been achieved."

This level playing field was in fact brought about by the EU VAT and E-Commerce Directive which created a completely new VAT regime for non-EU businesses supplying e-commerce services to EU countries.

The Register quotes AOL as saying:

"The High Court has confirmed that Customs & Excise followed the correct procedure in coming to its original decision to make any information providers with their hubs outside the EU exempt from VAT. AOL has always abided by the relevant legislation on VAT and will continue to do so."