A digital economy is essential to Britain's future, claims the government. Why, then, is it taxing small fibre-optic network operators out of the market?
David Scammel couldn't have received a less festive Christmas present. On 20 December 2007, the news finally arrived from the Valuation Office Agency (VOA). It told him that he had to pay £120,000 in taxes - 25% more than he had expected - for a bunch of glass.
The president of Sohonet, which runs a high-speed fibre-optic network for the film industry in Soho, London, was "gutted" at the tax imposed on his fibre lines. He says he is now paying more annual taxes on his fibre cable than he makes in profits each year.
The copper cable that probably feeds your DSL line at home can carry lots of data, but fibre-optic cables, which use light instead of electricity to carry signals, can beam data at far higher speeds. The runners who used to scurry around Soho with canisters of film are gradually being replaced with Sohonet's fibre network, which transfers the huge video files for films around London's creative square mile. Scammel also runs fibre out to studios such as Pinewood, and to Telehouse, the jumping-off point for international fibre links that he rents to reach clients in Australia and the US.
"This came at a time when we were quite pleased with ourselves, running huge film projects between Sydney and LA, based out of London. And then as far as I'm concerned the government said, 'We don't understand your business, therefore we're going to tax you,'" said Scammel.
He feels as though the government is choking off competition by taxing fibre cable in a way that places an unfair burden on smaller firms with specialist business models - at precisely the time when it has talked about the importance of the digital economy to Britain's future. He is so annoyed that he's intending to mount a legal appeal to tackle the issue. And he's not alone.
The UK government currently views fibre-optic cable as a "rateable asset", lumping it in with other commercial property as something with value that businesses should pay tax on. The VOA sets the rates for different types of property, and local authorities collect them as their primary source of revenue.
The VOA revises the rates every five years. The current rates, due for revision next year, charge for fibre-optic cable using two parameters: the length of the cable and the number of fibres (up to 48) running in it. The more strands of fibre that you put into a cable, the more data you can push through it.
The current numbers (which the VOA says are subject to change) rate fibre networks in three categories: those running outside London that are more than 3,000 fibre km in length; those under that length; and then a separate one for networks inside London, reflecting the city's higher property value. Tax on a fibre network outside London but under 3,000km, such as Sohonet's link to Pinewood Studios, starts at £333 per km per year for a single fibre. Two fibres would cost £250 each. By the time Scammel got to 10 fibres, he'd be paying £97 per fibre, per kilometre.
But Scammel doesn't want lots of fibres in his cables, and that's part of the problem. He complains that the VOA doesn't differentiate between large players and small ones, like himself. "There's no differentiation in how the fibre is used. If you're a telco that wants to get your investment back by running 100,000 different circuits across it, you could put together a business model," he says.
But Sohonet is a niche player serving a relatively small number of firms. His fibres are often "dark" - unused - because they're not required all the time, but once they have been lit for the first time he has to pay tax regardless forever after.
"We've got a number of prospects out in Bristol. We'd like to run a fibre out there, but it would only be a single pair," says Scammel, adding that Sohonet was originally set up because the telcos couldn't offer the kind of niche service he does. "The economics of the fibre rates make that impossible. The rate would cost us more than we pay for our circuits to LA."
Not many people like paying their taxes, but Scammel has a point, according to Tim Johnson, managing director of Point Topic, a specialist broadband analyst. "It is a problem. What seems to make it worse is that, as far as one can see, it isn't very consistent," he says. "It's yet another impediment to anyone investing in infrastructure."
The biggest inconsistency is the way that BT is assessed on its own fibre, alleges Aidan Paul, chief executive of Vtesse Networks, which has been locked in a legal battle with the government over how fibre is taxed. "They couldn't agree on a satisfactory formula to assess BT on, and ended up deciding on a number," says Paul, pointing out that BT has made massive fibre deployments in the last few years.
Vtesse originally won a 2004 case against the VOA to change its fibre rating, but the VOA appealed to the Lands Tribunal, which ruled in its favour (http://bit.ly/fibre2). Paul cites witness testimony from a property consulting firm in the Lands Tribunal hearing suggesting that BT is charged £15 per fibre km - far below the amount Scammel is charged. BT declined an interview for this article.
Paul got the European commission to open an investigation in 2005, on the allegation that BT was receiving state aid. The commission ruled that it could find "no advantage" in the ratings. Paul responded, in a briefing document published in Computer Weekly last year: "On 19 February 2007, Vtesse Networks lodged an application with the European court of first instance to have the commission decision set aside, on the principal point that the commission didn't find an advantage because it didn't look."
But the VOA disagreed in a statement to this paper, after declining a phone interview: "The Lands Tribunal has approved the VOA's approach and valuation scale as applied to fibre networks in respect of the 2000 rating lists. Our approach has also been approved by the European commission as fair and correct."
Yet its own documents seem to suggest that the system favours larger networks in certain cases. "A 20-route km extension to a small network has a significant effect on the valuation, but the same 20-route km extension to a large network can be considered to be de minimis," it says. That's governmentese for "negligible", and it's because of rules that allow the operator to "round down" a £9,000 fee increase to the nearest £10,000 - that is, zero.
The whole thing makes it harder for people such as Sohonet to do business - yet it's just the kind of infrastructure provider the government should be supporting, warns Jeff McKeown, sales director at Fibre Technologies, which sells equipment to boost the performance of fibre networks. "Carter's [Digital Britain] report recently was about how we stay competitive and bring up the national capability from a domestic perspective," McKeown says. He argues that we must mirror that activity on the business side.
"You have a government on the one hand saying that broadband is important to the economy. Gordon Brown has said it, Obama has said it," complains Paul at Vtesse, citing the potential economic and environmental benefits of fibre (think videoconferencing and remote collaboration). "Why put up an obstacle at the beginning to stop people deploying these things, or create sufficient uncertainty where people can't justify the investment case?"
He can mull that question while he readies his appeal to the Lands Tribunal, which he hopes will be heard this year. He is also hoping for a decision from the European court of first instance in 2010. Perhaps for the smaller, specialist fibre players, there might yet be light at the end of this very long, thin tunnel.
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