The government has been accused of sabotaging its own broadband ambitions after reneging on a pre-election promise to reform the way high-speed fibre-optic networks are taxed in the UK.
Several network operators are annoyed that Ed Vaizey, minister for culture, communications and creative industries, has not delivered on his vow to review the business rates that are applied to fibre networks.
Vaizey revealed last week that this review would not take place, following a meeting with the branch of HM Revenue & Customs which taxes fibre networks in the UK. Instead, new guidelines have been issued which make little changes to a regime which Vaizey himself attacked last year for causing "huge damage to telecoms in the UK".
The issue is particularly sensitive because the government has declared that the UK will have the "best superfast broadband network in Europe" by the end of this parliament, but is providing little public money to support this ambitious goal.
Chris Smedley, chief executive of network operator Geo said, "If the government cannot provide funds to help roll out networks because they expect the market to do it, the least they could do is not put direct disincentives in our way".
Vtesse Networks, another fibre operator which brought legal action against the previous government in an unsuccessful effort to overturn the current regime, has also been angered by the failure to hold a review.
"They simply cannot expect us to invest in an area, and then tax it so that it is not economically viable," said Vtesse's chief executive, Aidan Paul.
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 per cent. Fibre offers much faster connectivity than the copper lines that link most homes, but is expensive to deploy.
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.
In November 2009, Vaizey said that a Conservative government would make a review of the fibre tax a priority. Late last week, though, the VOA announced updated valuation guidance for telecoms networks which only include two small changes to the previous system. This follows one meeting with Vaizey since the election.
Trefor Davies, chief technology officer at internet service provider Timico, says that the VOA's changes will actually make it more expensive for smaller operators to build fibre networks, because the rateable value of a fibre line has increased sharply compared with five years ago.
"The upshot of this is that at a time when industry has been crying out for a level "rates" playing field the VOA has made it an even more unequal commercial battle in favour of the large incumbent operators,"
Vaizey has now welcomed the VOA's changes, and urged telecoms operators to give their feedback.
"Getting the conditions right to facilitate private sector investment in new high-speed broadband connections is a government priority and we are working to create an environment where businesses can get the most from the UK's digital infrastructure," a BIS spokesperson said.
The VOA taxes fibre networks because they are a valuable resource. Paul, though, argued that it is wrong to impose such levies on companies that are trying to build new infrastructure, pointing out that the original telegraph companies were not taxed on their assets until many years after they started operating.
Smedley added that it was "too early to say" whether Geo would have to take legal action against the current guidelines, saying he remained hopeful that the government might still start a proper review soon.
"I am hoping that the position will change. This is not what we were expecting," Smedley said.
BT, though, denies that the current rating system is unfair and said there was "little justification" for a review.
"Over the past few years several parties have advanced arguments along the lines that BT receives preferential treatment in the way that it is rated," said a BT spokesperson. "None of these arguments is true. They have been heard, tested and then rejected by the European Commission, the Lands Tribunal in the UK and the UK court of appeal - and leave to appeal the decision was only last month refused by the UK Supreme Court. In every case the authorities have found that the rating system is being applied fairly and does not confer an unfair advantage on BT."
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