VAT Levied on United States Internet Service Providers in the United Kingdom

Between 1997 and 2001, the Commissioners of Customs and Excise did not subject foreign telecom suppliers supplying mixed packages in the United Kingdom to value added tax (VAT).  Yet, after February 2001, the commissioners considered that foreign telecom suppliers could be subject to VAT when supplying mixed packages in the United Kingdom (UK) and it was proved that the provision of telecom services was the predominant part of any package of services supplied. Hence, from 2001 until 2003, foreign telecom suppliers in the UK were not subject to VAT. This rose complaints from UK service providers before the Customs and Excise Commissioners. Some of these complaints even escalated to judicial review.  This article provides an example of a UK case where the UK service provider complained against the commissioners because a foreign service provider was not subject to VAT, although providing mixed package services in the UK.

In UK case of R (on the application of Freeserve.com plc) v. Customs and Excise Commissioners (America Online Inc, interested party), [2003] EWHC 2736, (hereafter Freeserve v. AOL) the administrative court was to decide whether telecom suppliers incorporated outside the European Union and supplying mixed packages services in the UK were subject to VAT.  This case was decided before the European Union established a uniform taxation mechanism where anyone providing Internet services in the European Union is subject to VAT, including foreign providers.

The claimant in this case, Freeserve, was an Internet service provider (ISP) incorporated in the UK and supplying telecom services in that country.  The claimant complained before the Customs and Excise Commissioners noting that foreign telecom suppliers were not subject to VAT and this created an unfair treatment.  The Commissioners ruled against the claimant and the claimant sought judicial review.  American Online (AOL) was an interested party to this dispute.  AOL, a company incorporated in Delaware, U.S., supplied telecom services in the UK, including mixed package services.  AOL was not subject to VAT between 2001 and 2003. 

The Administrative court held that (1) the commissioners were under a duty to look and decide claimant’s case against AOL considering the administration of VAT as a whole; and (2) that one taxpayer had not judicial standing to bring judicial review proceedings against the taxing authorities with relation to the tax affairs of another. The court noted that there was an exception to this rule when the claimant had a peculiar interest in the impact of the decision taken by the tax authorities.  In this particular case, the exception did not apply, the court said, because any AOL competitor would be able to seek judicial review and complain that AOL were not subject to VAT. Thus, Freeserve had no standing to pursue this judicial review and it was dismissed. This was distinguished from R v A-G, ex p ICI plc (1984) 60 TC 1. 

After this 2003 case, the European Union has established legislation requiring ISP incorporated in countries outside the European Union to pay VAT when supplying services within the European Union.  The relevance of the Freeserve case still reminds as to a UK ISP’s legal standing to bring judicial review for unequal application of VAT rules to a foreign-incorporated ISP rending services within the UK.