Freeserve demands action on e-commerce VAT directive

UK Internet service provider Freeserve insisted on Wednesday that the UK government must move swiftly to implement a European directive that would see non-EU companies that sell Internet services forced to pay VAT.

Currently, firms that sell products such as software and music online don't have to pay VAT if they are based outside of the European Union. This has infuriated many European companies -- who must charge EU-based consumers VAT -- as they believe they are unfairly hampered from competing with rival companies, typically those based in America. US firms have lobbied against such a change for nearly two years.

A meeting of EU finance ministers last week agreed to change these rules, such that non-EU companies would have to charge European consumers VAT at their local rate and then pass on the money to the appropriate government. Member states will sign up to the new rules in February 2002, but the deadline for implementation is not yet known.

Freeserve has been aggressively campaigning against the current situation for several months. It believes that rival ISP AOL is saving at least £30m per year in unpaid VAT because it is based in America. HM Customs & Excise, which collects VAT in the UK, is understood to have conducted a review of the situation -- but no decision has been made.

"I am bitterly disappointed that, despite the new European proposals, Customs and Excise still refuse to make an announcement in relation to the VAT treatment of AOL," said John Pluthero, chief executive officer of Freeserve, in a statement on Wednesday. "The UK government has been sitting on this issue for at least one year, and despite attempts by us to raise the matter with the Treasury Minister, Paul Boateng, he hasn't even acknowledged our correspondence."

"Having previously blocked this proposal, Freeserve is calling on the UK government to now implement the new Directive into UK law at the earliest possible opportunity," Pluthero announced.

VAT rates in the European Union range from 15 percent in Luxembourg to 25 percent in Sweden. Companies affected by this new rule are expected to set up their operations in a single country -- likely to be Luxembourg or the UK, where VAT is 17.5 percent.

There are concerns that the rules will mean consumers will pay more to shop online, as US companies are not expected to absorb the extra cost themselves and are likely to pass it onto the consumer. Advocates of the legislation insist that it will provide a boost to European e-commerce firms.

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