In 2003,Vtesse
Networks, a small UK fibre network operator, challenged
the Valuation Office Agency's assessment of BT for business rates
in British and European courts. It argued that the VOA's assessment
amounted to an unfair subsidy to BT.
Vtesse won the first case at the Valuation Tribunal on a
technicality, but has lost all the ensuing court battles so far.
Its appeals are due to be heard in mid-December. A win for Vtesse
could unleash an investment boom in next-generation networks that
would shorten the government's timetable to give effect to its
Digital Britain policy.
Vtesse CEO Aidan Paul says the grounds for its case would have
disappeared if Treasury minister Stephen Timms had accepted an
independent recommendation prepared for the then Department of
Trade & Industry (now the Department for Business, Innovation
& Skills) not to
tax fibre networks.
The
Valuation Office Agency (VOA) uses a complex formula to work
out the rateable value of communications networks. The valuation is
subject to negotiation and appeal, which adds uncertainty to the
outcome.
Spokesmen for network operators
Virgin Media and TalkTalk say that anything to lower the tax
rate would be helpful, but it is uncertainty, more than anything,
that holds up their investment plans.
Taxing fibre networks
The
business rates tax is a UK property tax on non-domestic
property or "rateable hereditament" and includes land, buildings
and rateable plant and machinery. Its aim is to contribute towards
the costs of services provided by local authorities.
The rateable value is the hypothetical annual rent at which the
hereditament might reasonably be expected to be let from year to
year in an open market transaction at a certain valuation date.
Radio equipment, such as masts, has always attracted business
rates tax. The VOA is now exploring whether wi-fi hotspots and
Wimax wireless networks are also liable. If so, the tax liability
may be backdated five years, putting many non-profit community
networks at risk.
When rating fibre networks, the length of fibre, whether the
fibre is lit, how many homes the fibre "passes", and other factors
are taken into consideration.
The clearest explanation of how the VOA calculates rateable
values is contained in the European Commission's 26-page decision
(
2006/951/EC, Official Journal of the European Union 28.12.2006)
where Vtesse Networks claimed, unsuccessfully, that BT was
receiving state aid unlawfully. The appeal is due in British and
European courts in December.
The VOA rates BT on its "receipt and expenditure", but other
network operators are rated on the actual or deemed rental value of
their fibres. The VOA also considers the length of the fibre
between the local exchange and the customer's premises. The longer
the link, the more tax it attracts.
This makes it financially more attractive to use fibre over
short distances, such as within cities and suburbs. Customers who
live any distance from an exchange or roadside cabinet have to pay
the higher tax burden or do without. This can amount to £2,000 a
year for a 3.5km link, says one operator, "virtually 100% of what I
can charge". Some remote communities cannot afford this, so they
require financial support to get connected.
Discounted taxes
BT's fibre network stretches more than 17 million kilometres -
9,867,205km in the core or backbone network, and 7,685,103km in the
access or "last mile" network.
The VOA also operates a steep discount policy on lit fibres per
route. The more fibres that are lit on any one route, the less the
fibre owner pays per lit fibre. In addition, owners of networks
whose total length is less than 3,000km pay 11% more to light the
first fibre on a route. Together, these make it harder for smaller
network owners to compete with BT.
Instead of paying a per kilometre rate for its fibre network, BT
pays tax on what the VOA assesses as the hypothetical rental value
of BT's entire network.
This peaked at £533m in 2006. The VOA has since cut BT's
rateable value each year. According to its central rating list for
England, BT's rateable value dropped from £415m on 1 April 2008 to
£386m on 1 October 2008. The proposed valuation for 2010 is £255m.
Given the new tax rate of 48.5%, 2p up on last year, BT's business
rates bill will therefore be £124m.
In a neat symmetry, the amount of tax revenue lost as a result
of BT's reduced rateable value, around £190m, would be matched
almost exactly by the proposed levy of 50p per month per fixed
telephone line. Had the VOA not cut BT's rateable value, there
would be no need for the controversial levy.
In addition, if BT's fibre network were taxed per kilometre, it
would have to pay more than £1bn just for its local access network
in England.
The VOA has not responded to requests for an explanation for the
decline in BT's rateable value, but the European Commission says
material factors that could affect it include the expansion of BT's
network and the roll-out of competitors' networks.
According to BT's annual report to 31 March 2009, it had
property, plant and equipment worth £15.41bn, and spent more than
£3bn on capital goods. BT's Openreach subsidiary, which is largely
responsible for the UK's local access network (the links from the
subscriber to local exchanges), returned operating profits of
£1.22bn on sales of £5.23bn.
Unfair advantage
The VOA also treats BT differently in other ways. Non-BT network
operators (except Virgin Media, which is subject to yet another
different regime) are liable for business rates as soon as they
light their fibres. This cost is fixed by the VOA's formula (see
graphs). BT pays on the projected profit or loss on "rent" it
could make on both its lit and dark fibre. This is averaged over a
five-year rating period and adjusted yearly for material changes in
market conditions.
It must therefore include this cost in its prices. BT's tax bill
is an annual adjusted average. Other fibre network operators must
pay as soon as they light their fibres. Non-BT operators say this
gives it great flexibility in pricing, especially in specific
circumstances such as a competitive tender.
BT is therefore in a win-win position in bidding for contracts.
If it wins the business, great; if it loses the business, its
rateable value drops and it pays less in business rates tax.
Non-BT operators say the time difference between when the
liability arises and when it is paid means BT can afford to sell at
or below its break-even cost. This is because BT collects its money
well before it pays the tax, while other operators have to pay
whether the customer pays them or not. Also, the amount BT has to
pay is subject to adjustment.
BT and Virgin Media benefit in another way. BT pays tax on all
its fibre, dark or lit, and Virgin Media on the basis of the number
of houses that its network "passes" (i.e. could have access if they
wanted). They incur no extra tax liability for speeding up their
networks, but they would have to pay tax to reach more
premises.
So it pays them to "sweat their assets". Rationally, they should
increase both the speed and the number of people on the existing
networks rather than
increase their geographic coverage.
As Computer Weekly reports in the past year have shown, BT and
Virgin Media are both increasing the headline speeds of their
existing networks, but have sought public money to extend their
reach. Only very recently have they revealed plans to grow their
networks into presently unserviced areas.
Graph 1 shows the 11% discount given to network owners as
they light more fibres. Graph 2 shows how the amount of tax due
rises the longer the link from the exchange to the subscriber’s
premises. In both cases, the regime favours network owners who have
lit more than 3,000km of fibre.
Source: Valuation Office Agency
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