The government is backing European proposals which would force US on-line service providers to pay VAT for the first time next spring. The VAT proposals were included in Kenneth Clarke's budget last week.
Currently, US on-line services whose servers are based in the US avoid paying VAT, which currently stands at 17.5% in the UK. The companies are able to pass on these savings to customers. UK ISPs say this is "unfair".
The EU proposals have been welcomed by a UK industry which is "sick and tired" of having to compete against the US company's unfair advantage.
Larry Bloch, MD of ISP NetBenefit, said: "These companies are competing for British customers in Britain and therefore they should be made to play on a level field. Even if AOL and CompuServe think they are different, market perception says we are all the same - service providers."
However, Bloch believes the loophole should have been closed sooner.
"US companies should not have a competitive advantage and frankly I am disappointed the government has not managed to deal with this situation more quickly."
Jonathan Bulkeley, AOL's UK managing director, believes it is unfair to compare his company with UK ISPs: "When you speak to an ISP such as Demon or NetBenefit, you don't hear them talking about the editorial content of their services, because they don't have any editorial content or many of the other services we offer. They simply provide Internet access."
Bulkeley would not give a clear answer on whether or not AOL will pass on the VAT charge to customers. CompuServe has also taken a wait-and-see stance. Martin Turner, MD of CompuServe UK, said: "Once the EU has reached a decision we will obviously adhere with its regulations to the word."
EU member states will vote on the proposed directive next April at which time all three of the US services will announce whether or not they will pass on the charge to customers. However, Bulkeley spoke of "solidarity" between the service provides, suggesting they will all make the same decision.
See leader, page 30.
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