It's time for the evasion to stop and the litigating to begin

John Pluthero, Freeserve chief executive

Freeserve claims this discrepancy saves AOL up to £40m a year and creates an uneven playing field for UK net service providers.

In response to the complaints, HM Customs and Excise has issued a statement claiming that it is EU law that is at fault for the oversight and that, until European law is changed in July 2003, there is nothing it can do.

Fault finding

"EU law didn't encompass everything about the telecoms sector and we have got to wait until new EU legislation comes into force," said a Customs and Excise spokeswoman.

"It is an unfair system, but the level playing field will come in 15 months."

Freeserve was unable to comment on the Customs and Excise statement, as it has already started legal proceedings against the UK Government.

The decision to take the row to the High Court followed prolonged and, according to Freeserve, futile talks with Customs and Excise.

"The UK Government has been fobbing off Freeserve and BT for over a year on this issue, promising a decision is imminent each time we speak to them. It's time for the evasion to stop and the litigating to begin," said Freeserve chief executive John Pluthero in a statement.

"You really have to wonder what it is AOL has over this government. The Treasury will have allowed over £100m to slip through its fingers. If we or BT can't get to the bottom of it, then let's see if the High Court can't provide some answers," he added.

AOL claims that it is doing nothing wrong.

"AOL complies with the law and will continue to comply with the law and with all relevant UK customs rulings. AOL will of course comply with the EU VAT directive with effect from 1 July 2003 as directed by customs," reads a statement from the service provider.

Customs and Excise officials were unable to say whether the changes in July 2003 would allow the government to claim back all the unpaid VAT owed by AOL.