The search is on to find a way for communications minister Ed Vaizey to save face after he reneged on an election promise to review the business rates regime with respect to optical fibre networks.
The way out appears to involve local councils, which are responsible for levying the tax, zero-rating publically-owned fibre networks that are also used to carry private sector traffic, say sources familiar with the situation.
Prior to the election, Vaizey promised to review the business rates regime, which he said was too complex. Last month, following a meeting with the Valuation Office Agency, which determines rateable values, Vaizey said there would be no review.
Publically-owned fibre networks do not attract the tax as long as they carry only public sector data traffic. However, as soon as they accept traffic from third parties they are classified as shared networks and therefore become liable for the tax, which can be punitive.
The loophole, which is thought to be within current rules, is that local councils can set the levy on such shared networks at zero. "This means that they have been rated, as the law demands, but the rate is zero, thus avoiding payment," said one person familiar with the idea.
Crucially, the idea will also be revenue-neutral as far as the Treasury is concerned, a point made by Vaizey at an industry day to discuss broadband roll-out plans.
The Treasury is unlikely to lose out anyway. The Valuation Office Agency, which sets rateable values for business assets, has proposed a £20 per year charge for every house with a non-BT broadband connection. If accepted, the government could garner an estimated £200m per year from broadband homes, according to VOA figures.
The UK has many thousands of kilometres of publically-owned fibre networks strung across cities, towns and countryside. Mostly these are localised, such as the 100Mbps Ethernet-based London Grid for Learning, but others, such as the £90m South Yorkshire Digital Region, cover more ground, including rural areas.
Vaizey has called for proposals to use all available infrastructure, including publically-owned networks, to help deliver a universal 2Mbps broadband service by 2015.
The idea was that these networks, which have already been cost-justified and built, could form the backbone of regional telecommunications firms which would provide local broadband connections.
Technical experts said it was possible to segregate public and private traffic on the network, thus ensuring that urgent or classified traffic was not compromised.
At present, short fibre connections attract a top rate of tax, which makes them uneconomic. However, zero-rating them would make them much more affordable, enabling a faster roll-out of fibre to homes and local businesses, they said.
The only downside is that the Treasury may miss out on some future income if local authorities come to own all local networks,.
However, this could be more than covered by the improvement in productivity of existing fibre networks, savings from e-health, e-education and other e-government initiatives, income from private subscriptions to publically-owned networks, and an overall pick-up in GDP, experts said.
According to International Telecommunications Union secretary general Hamadoun Touré, universal broadband access can boost GDP by 1% to 3%.
Vaizey is expected to receive the proposals within the month.
Short but not sweet - fibre rates
The Valuation Office Agency's 2010 rates on fibre networks not provided by BT or Virgin Media start at a rateable value of £2,000 per year.
At a tax rate of 40%, small network operators will have to charge subscribers some £800 a year or £66.67 a month just to break even on the tax, let alone make a profit.
The VOA has also proposed a tax of £20 per house connected to non-BT broadband networks.
BT's rateable value is calculated on its receipts and expenditure, while Virgin Media pays £7.50 for every "house passed" by its network.
BT has said it will pay rates on its network, but it has declined to say what the effective rate amounts to on a per house basis.