AOL will not have to pay VAT on its new broadband product, which was announced on Tuesday, despite previous objections raised by the ISP's UK rivals.
Even though it will not have to pay 17.5 percent of its broadband revenues to the UK Treasury, AOL's broadband package will be £5 per month more expensive than the high-speed packages offered by Freeserve and BTopenworld.
AOL is exempt to VAT on revenue raised from Internet access products sold in the UK because its main servers are based in the US. HM Customs and Excise ruled in 1997 that an Internet access package that involved "the supply of some content in addition to the provision of Internet access" would not be liable for VAT in the UK if the company providing the package was based outside Britain.
Freeserve has been campaigning against AOL's VAT-free status for years, and recently forced a judicial review of the situation.
It seems likely that the situation will remain the same until the middle of 2003, when the EU directive on e-commerce will be implemented, meaning that non-Europe-based companies selling services in the EU must also pay VAT.
AOL told ZDNet UK on Tuesday that it has no plans to raise the cost of its broadband product above £34.99 if it did become liable to VAT on its UK sales.
"Currently, our broadband product isn't VAT-able because AOL is based outside the EU," an AOL spokeswoman said. "We expect we will have to pay VAT once the EU directive comes into force next year, but we have no plans to raise the price at this stage," she added.
In the meantime, it appears likely that AOL will make more of a profit on each broadband customer than other UK ISPs.
Freeserve wasn't prepared to comment about AOL's broadband product.
Late arrival at the broadband ball
By waiting until this week to announce details of its self-installation broadband product, AOL is some months behind other UK ISPs. Although the company has been one of BT's most vocal critics in the past, AOL remained silent in April when companies including Freeserve, BTopenworld, PlusNet and Pipex jostled to announce their broadband plans, once BT Wholesale slashed the prices of its ADSL products, which these ISPs resell to customers. AOL insisted that it was waiting until it had solved some technical issues with BT before launching a high-profile broadband product to its subscribers. Some in the industry have claimed that the ongoing VAT row prevented it from announcing broadband pricing details because it couldn't predict when it might become liable for VAT.