Freeserve is taking HM Customs & Excise to court in an atempt to overturn a loophole in tax law resulting in AOL's exemption from paying VAT in the UK.

The ISP, Britain's biggest, filed for a judicial review of customs treatment of AOL - which it estimates saves the American giant £40m a year -
on Friday (March 8). The case should be heard in a month or so, according to The Sunday Times, which was awarded the Freeserve scoop.

AOL levies no VAT on its services in the UK, thanks to an indulgent -nay, eccentric - 1997 ruling that the company was a content provider operating outside the European Union, and therefore not liable to charge for VAT. If AOL UK had, like Freeserve, been a classified as a telecoms provider within the EU, then it would have had to charge VAT. AOL UK appears to have avoided this classification because its servers live in Virginia.

AOL told the Sunday Times that it was not lobbying the government on the matter. Too right, it's had a free ride on VAT for several years - probably a lot longer than it could have dreamed of.

However, Freeserve's action may be having an unsettling effect on at least one score: AOL has been notable by its absence for the broadband free-for-all in the last couple of weeks, set in train by cheaper BT wholesale prices.

According to Freeserve, AOL is delaying in introducing a broadband option in the UK, because, The Sunday Times says, of "doubts over the legitimacy of its VAT exemption. It would be damaging for it to introduce a product at a price that it could not sustain." ®