Wednesday, November 11, 2009

Digital Britain taxation vexation

The 50p/month landline tax continues to be controversial. Charles Dunstone, CEO of TalkTalk, set out his opposition to the proposed tax in an address to a BIS Committee. He argued that the tax will result in at least 100,000 low income homes being forced to give up their broadband lines. The footnote to TalkTalk's press release provides this by way of explanation:
"...50p price rise on voice/broadband package costing ~£15 per month represents a 3% price rise. Assuming a -0.2 elasticity (which is at the low end of estimates) this will result in a 0.6% fall in demand which is 120,000 broadband homes (20m voice/broadband customers)..."
Dunstone also argued that "the scheme is likely to delay next generation broadband roll-out in rural areas rather than hasten it as private investors will wait for public funds to be made available. This will mean that much of the tax will be wasted investing in networks that the private sector would have built themselves anyway."

The Guardian and Computer Weekly both recently reported that Stephen Timms is pressing ahead with plans to introduce the tax, despite Conservative opposition, which will be contained in this year's finance bill. This would appear to be a break with protocol, as Parliamentary convention dictates that this close to a general election (which must be called by next summer) the finance bill should be short and uncontroversial.

The 50p levy isn't the only taxation issue. A far more complex matter lurks beneath the surface, which was recognised by the previous Caio Review: the issue of business rates on fibre networks and, potentially, wireless broadband options too.

Computer Weekly has been campaigning actively on this issue, beginning in July with this account of Vtesse Networks' long-running dispute with the Valuation Office Agency (VOA). Vtesse argue that "the valuation system provides deep discounts to large fixed network operators. This raises the relative cost for smaller operators and creates a barrier to market entry for new investors." This in turn "stifles" investment in next generation access infrastructure.

In October CW reported that the Broadband Stakeholder Group (BSG) was seeking clarification from the VOA of the business rate tax rules the VOA would impose on next-generation networks. This will allow potential investors to work out their risk and return on investment more accurately. The issue was described as "the biggest stumbling block to the roll-out of competitive, high-speed networks under the government's Digital Britain policy."

Also in October CW revealed that the VOA was planning to tax both wireless and optical fibre networks, though the detail was not yet clear:
"The proposed £7.50 "fibre rate" is the same rate that the government levies on Virgin Media for the 12.5 million homes that could get its cable TV service, if they wanted...It is still not clear what kind of wireless access point the VOA would consider taxable. Companies that have replaced their wire-based telephone and data networks with in-building wireless networks, such as those provided with femto or pico cells, may find themselves liable for the tax. Owners of community wireless networks, many of which run on a not-for-profit basis, may also be caught. Companies that offer wireless access include Hilton, Thistle and Ramada Jarvis hotel chains, Caffe Nero and Starbucks coffee stores, as well as BA, Flybe and Skyteam airport lounges. Users with home wi-fi networks might fall foul of the VOA if they allow others to use their connection."
An additional article suggest that the wireless tax could be backdated to 2005:
"The considering whether wi-fi and Wimax equipment should form part of the heriditament on which the tax is based. If it turns out that they do, the tax could be backdated to the last time a rating was done, which was April 2005. The VOA has published a new general valuation for 2010 in draft form for comment and appeal. Computer Weekly has learned that the VOA has suggested that wi-fi hotspots and Wimax networks be rated at £100 per access point. BT alone has 600,000 potential access points because BT Home wireless routers can be set to provide public access. This could rake in £29m a year for the government, and possibly a further £145m in back taxes."
While another article alleged that these issues were killing Digital Britain, particularly the aspirations to address poor provision in rural areas:
"The taxes and possible new levies on homes and small businesses connected to fibre and wireless networks make access to broadband more expensive than it need be, especially in rural areas. The UK and Ireland are the only European Union members to tax telecommunications networks. Part of the formula for calculating the rateable value of a broadband link depends on distance. Rural users pay more for connections because network service providers pass on the cost of the tax. This makes broadband connections unaffordable for many in rural areas."
Then in November a further article, revisiting Vtesse Networks' case, made a very interesting allegation:
"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."
There are a number of other very interesting allegations too:
"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...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."
Are these issues, also reported by ThinkBroadband, the real reasons why the UK is where it is in terms of broadband provision? Finally, the most recent CW article reports that the Conservative Party will "prioritise a review of the business rates tax on fibre networks if it comes to power"...whether "prioritsing a review" equates to "sorting this mess out" we can but wait and see.

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