One of the UK's largest ISPs (Internet service providers), Freeserve on Tuesday said it may pull out of the UK due to issues over the country's VAT (value added tax) system. Freeserve is charging that its largest competitor, the UK division of AOL Time Warner, has an unfair advantage over UK-based ISPs because the US-based company does not have to charge its customers VAT on its flat-rate unmetered Internet package. The loophole is a result of a 1997 Customs & Excise guideline issued by the UK treasury department, HR Treasury, that freed ISPs not based in the European Union from UK VAT liability as long as the ISP mostly produces content instead of telecommunication services, Freeserve said in a statement. Freeserve asserts that America Online in the UK is an ISP and therefore mainly supplies telecom services, making it liable to VAT. Freeserve has written to HM Customs & Excise and the Chancellor of the Exchequer, Gordon Brown, to request that the UK division of AOL either be held responsible for VAT charges, or that the law itself be amended so that it is equally applied, Freeserve said. For its part, AOL said in a statement that it complies with the UK tax laws. The company's status as a provider of information services from outside of the European Union is "a status available to any other similarly positioned service provider," AOL said. According to Freeserve - which is owned by Wanadoo, the ISP subsidiary of France Télécom - the UK is the only country in Europe where AOL is free from VAT charges. A representative at AOL UK said he was unable to comment on AOL's tax commitment elsewhere in Europe, but added that the issue did not appear to be germane to Freeserve's complaint to HM Customs & Excise. Representatives at the Treasury could not immediately be reached for comment. UK ISPs must include a 17.5 per cent VAT charge in their fees, which for Freeserve brings its total monthly fee for its flat-rate Internet access package to £12.99, Freeserve said. If AOL were to add VAT to its current monthly flat-rate Internet plan of £14.99, it would have to charge its customers £17.60 per month, Freeserve said. Citing a European Internet report by Merrill Lynch & Co, AOL currently has an annual tax advantage of £2.6 million per 100,000 flat-rate customers over its U.K. competitors, Freeserve said.