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Freeserve threatens to quit UK in tax row

LONDON - Freeserve has claimed that its rival America Online is gaining an unfair advantage by exploiting a loophole in UK tax laws, and has threatened to quit the UK for the US unless this changes.

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AOL, which is one of the UK's most popular ISPs, does not pay VAT because it is registered for tax purposes in the US.

Freeserve claims that AOL can wield a "powerful competitive advantage" over UK ISPs by not charging VAT on its flat-rate internet service.

John Pluthero, chief executive of Freeserve, said his company would have to consider moving out of the UK unless Customs & Excise changes AOL's tax position to create a "level playing field".

The news that AOL does not charge VAT was revealed in a broker's report from investment bank Merrill Lynch. According to the report, for every 100,000 flat-rate customers, AOL earns £2.6m a year by not charging VAT.

Freeserve says that if AOL charged VAT, it would have to charge customers £17.60 for unmetered internet access, compared with Freeserve's fee of £12.99.

The US company has avoided VAT because of a 1997 Customs & Excise ruling, which states that non-UK ISPs that are classified as supplying content, rather than telecoms services, are exempt from VAT.

Freeserve claims that AOL is mainly supplying a telecoms service and is, therefore, liable to VAT. Freeserve has called on chancellor Gordon Brown and Customs & Excise to change AOL's status.

AOL defended its position by saying that it complies fully with all the laws in all territories in which it operates.

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