Freeserve has won the first round in its legal battle to force rival Internet Service Provider AOL to pay VAT in Britain.
At the High Court on Wednesday, a court ruled that the Freeserve's case merited a full judicial review. This means the UK Customs and Excise Commissioners will have to explain their decision not to make AOL pay VAT, at 17.5 percent, on the money it receives from UK subscribers to its Internet services.
Customs and Excise believe that AOL is exempt from paying VAT in Britain because the company is based in America.
Freeserve disputes this decision, pointing to a European Union ruling that AOL should pay VAT because its service predominantly consists of the provision of "telecommunications services". It claims that AOL will have saved £100m by summer 2003, when a change in the law may mean that AOL must pay VAT in Britain.
"Freeserve is pleased to have won the opportunity to proceed with its challenge in what we believe to be the unlawful VAT treatment of AOL in the UK. 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," said Freeserve in a statement after the court's ruling was announced.
According to reports, AOL's legal council described Freeserve as a "disgruntled competitor", and said the ISP had no business "prying" into AOL's private arrangements with Customs and Excise.
AOL has insisted in the past that question of whether it should pay VAT in Britain is simply a matter for the UK government.