AOL tax row turns bitter

Does AOL owe the tax man money?

The row between internet service providers Freeserve and AOL about the amount of tax each pay has moved up a gear.

A High Court judge has listened to the arguments on both sides and ruled that the case should proceed to a full judicial hearing.

Freeserve argues that the VAT man has given AOL a £100m competitive advantage because of a loophole in the tax laws which makes the US-based service provider exempt from European taxes.

The row centres around the type of service AOL is providing its UK customers. If a judge finds that its business is mainly as a telecoms provider then it will be subject to tax.

War of words

We estimate that £100m of tax has been lost to the Treasury through Customs' failure to apply existing law

Freeserve statement

If on the other hand it is found to be a content provider it can escape taxation thanks to a European loophole which allows internet service providers outside the European Union to remain exempt.

Whatever the outcome the row between Freeserve and AOL has become bitter.

AOL's lawyer Roderick Cordara accused Freeserve of being a "disgruntled competitor" with no business "prying" into its dealings with Custom and Excise.

Freeserve in turn says that it just wants to see a level playing field and is glad its legal action lives to fight another day.

Moot point?

"We are pleased to have won the opportunity to proceed with what we believe to be the unlawful VAT treatment of AOL in the UK," the company said in a statement.

"We estimate that £100m of tax has been lost to the Treasury through Customs' failure to apply existing law and find it extraordinary that we should even need to undertake this action when this is money to which the UK government is already entitled," it went on.

It could become a moot point as the loophole allowing foreign companies to operate tax-free in Europe is to be re-examined at a European level next summer.

For its part, Freeserve has moved its lucrative Anytime internet service to the island of Madeira in order to pay cheaper tax.