Brussels inquiry could land BT with huge tax bill

The European commission announced yesterday it was launching an in-depth investigation into business rate taxation in the UK's telecommunications sector in a move that could leave BT facing a massive tax bill.

The move follows a complaint from a small telecoms service provider, Vtesse Networks, that BT and Hull-based Kingston Communications are given preferential treatment over the way in which their networks are taxed.

If the commission finds the tax system did give the companies an unfair advantage over their competitors they could be forced to reimburse the Inland Revenue.

In its statement announcing the start of the investigation, the commission said the UK's valuation office agency, which determines business rates, "applies a certain asset valuation method to BT and Kingston, while it applies other methods to their competitors". It added that this system "may favour BT and Kingston, resulting in a disproportionate tax burden for competitors".

"Tax benefits restricted to some undertakings may, under certain conditions, distort competition and constitute illegal state aid."

However, the commission acknowledged that some difference in tax treatment might be justified by "the intrinsic features and inherent logic of the tax system". It said its investigation, which could last for as long as two years, would run in parallel with the Department of Trade and Industry's inquiry into the same issue, which started in 2003.

Yesterday the DTI said it expected the commission to clear it of any breach of the rules. "The government considers that no aid is involved in the rating system and is confident the commission will reach a similar conclusion," said a spokesman.

"There is no differential treatment under the rating system between BT, Vtesse or any other telecoms operator."

BT was equally dismissive. "BT is surprised that the EC has decided to investigate the UK government over the property rate that BT has been paying," the company said.

The former monopoly said it regarded any allegation of state aid as "groundless" and that it had "received no benefit from the UK government".

Kingston said that it did not expect any material impact, even if the EC investigation did conclude state aid rules had been broken.

Aidan Paul, the chief executive of Vtesse, said BT could have received up to £12bn in tax breaks since 1995 - a claim which the company described as "rubbish".

He said his company had taken its case to Europe after exhausting every avenue open in the UK.

"This is a domestic issue and should have been dealt with domestically, but no one in the UK was prepared to stand up and sort it out.

"The government's attitude was basically, 'piss off and pay the tax'."

The issue of business rate taxation is a sensitive one for the industry. Some consider that, irrespective of the problem of the way the tax is levied on BT and Kingston, the overall tax level is too high.

"The rating valuations were determined at the height of the telecoms bubble and the absolute level is too high, making it harder to roll out broadband infrastructure," according to Richard Sweet, the director of government affairs at the telecoms group Thus.