Back in January, the European Commission revealed it was investigating the British government’s use of property taxes. At that time, the commission said its in-depth inquiry would look at whether or not the UK government’s preferential business tax rates to BT and Kingston breached EU rules on fair competition. This is because the two former state-owned telecoms operators enjoy lower property taxes than their rivals. The commission said this could amount to an effective state aid, which distorts competition.

The inquiry was prompted by a complaint from a rival UK telecoms operator, Vtesse Networks Ltd, which supplies telecoms services mainly to the business sector, as well as concerns expressed by other rivals.

Following this official complaint, the European Commission asked the UK government to explain why BT currently pays two or three times less property tax on its telecoms infrastructure than other telecom companies.

Apparently, the tax formula that applies to BT dates from 1995 and was established by the Inland Revenue’s Valuation Office Agency (VOA) after the UK telecoms industry was opened up to competition in 1992. Since then however, the telecoms landscape has changed dramatically, with the widespread roll-out of optical services, which BT’s rivals commonly rely on to deliver their services to users.

The overall property tax on this newer infrastructure can be two to three times higher than BT’s overall tax bill, according to Vtesse, adding that this could result in unfair competition in the market. If BT’s property tax formula is found to be in breach of European competition rules, then it could face the possibility of paying back hundreds of millions of pounds.

The Department of Trade and Industry has been reviewing the tax formula that applies to BT, along with Hull-based Kingston. However, a report from the DTI which was due last year has not yet been published. The commission has demanded to know why the report has been delayed and what conclusions the DTI has so far reached.

The commission has said that if BT’s property tax formula is found to be in breach of European competition rules, the company could be forced to pay back every penny since the formula came into operation in 1995.

BT did not respond to ComputerWire request for comment.