Monday, August 23, 2010

Vaizey verifies VOA's verdict: further fibre taxation vexation



The Valuation Office Agency has chosen not to reform business rates on fibre networks, despite the government making a commitment to review them prior to the election earlier this year. This issue has long been highlighted as a barrier to further investment in broadband infrastructure. The Guardian had this to say:
"According to both Geo and Vtesse, the current ratings system pushes up the total cost of building and running a new high-speed fibre network by at least 10%...The issue centres on the way that the Valuation Office Agency, a branch of HMRC, taxes networks. Under the current system, most operators are charged according to the length of their networks, incurring significant costs every time they "light" a stretch of fibre. BT and Virgin Media, though, who have the largest fibre-optic networks in the UK, are taxed in a different manner, based on their revenues and expenses. Smaller rivals have long complained that this gives the biggest operators an unfair advantage, resulting in a less competitive market that harms customers."
The VOA's statement is here. But here's what Minister for Culture, Communications and Creative Industries Ed Vaizey MP (whose statement on the VOA announcement is here) had to say at last year's Dark Fibre International Convention, as reported by Computer Weekly:
"Ed Vaizey said the business rates regime - which dates from 1601 - was "an active disincentive to competitive, next-generation access roll-out". He said responsibility for the rates had been shared by too many government departments: the Valuation Office Agency (VOA); the Treasury; the department of communities and local government (DCLG) which owned rating policy; and the department of business, innovation and skills, which owned the communications aspects. "No-one's prepared to take responsibility for the whole picture," he said. "We see policy shared between a bewildering array of government bodies and quangos. This is something I intend to fix." Vaizey also referred to VOA proposals to tax wi-fi and Wimax networks. "No matter that the VOA claims that this is just an extension of the existing policy - it's still damaging," he said."
He made similar remarks at the NextGen09 conference in Leeds, see this previous post. There is some intriguing history to all this, which I've reported previously here. Clearly a complex issue in a difficult economic climate, but this does seem rather an about-turn and at odds with the government's intention for the UK to have the best superfast broadband in Europe by 2015 (as I reported here).

What's particularly challenging is that the rating system employed by the VOA for networks includes a distance-dependent element. This means that if you're provisioning a network in a rural area, not only are your installation (capital) costs higher (because you have to dig further), your ongoing revenue costs are higher too, as your longer lines command a higher rate than the shorter lengths required in urban areas.

Lots of commentary on this - see this item in Computing,  no review on fibre tax on Fibrevolution, Pauline Rigby's taxing times for UK broadband (key quote: "...the government will probably earn more from the fibre than the firm that invested to put the fibre in the ground, especially once VAT is added to the equation"), Trefor Davies' blog ("In 2005 if you were running a pair of fibres over 1km you would be stung with a rateable value of £280. In 2010 this has now shot up to £2000.") and Adrian Wooster's blog:
"...the additional rateable value for connecting a corner café in a small town network might be in the order of £330 per year...This would be unavoidable if the network used a P2P Ethernet but if the café happened to share a PON splitter with some domestic customers then the rateable value might be reduced to £20 per year. If I were designing a network today this would certainly influence my choice of technology, and if I were a member of the Metro Ethernet Forum or a manufacturer of fibre I’d be rather concerned that I’d been singled out in this way."
The distinction here is between the two means of calculating rateable values used by the VOA: for domestic users there is flat rate of £20 per home connected, whereas WANs are charged on the basis of distance, amount of fibre in the scheme and the number of fibres lit. As Adrian Wooster says in his post, this seems to add an additional layer of complexity to an already difficult area, especially as many networks are likely to serve a mixture of homes, businesses and other premises too. Adrian also points out that an unintended consequence of this approach could be reduced network openness and infrastructure competition, which is something Ofcom should be animated about perhaps?

An interesting interpretation of the government's intentions from PublicTechnology:
"The Coalition may have found a way to pay forDigital Britain after all – charge households not using BT more money to connect to any future next-generation UK broadband network. That at least is one way to interpret a proposal from The Valuation Office to levy a £20 tax on homes that connect to any such fibre system other than by the former State telecomms company, but just £18 for BT hook-ups."
Similar analysis from Computer Weekly here.

Wouldn't the long term economic gains (and the tax revenues they would generate as a consequence) from the increased availability of broadband infrastructure far outweigh the revenues lost in the short term by reducing the tax bill for new networks? Lots of compelling evidence suggests that this continues to be the case.

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