Affordability of broadband in the UK

Simon Woodhead

Simon Woodhead

16th August 2021

By Peter Farmer

In late July, the UK’s regulator, the Office of Communications (Ofcom) published a series of documents with some inter-related themes. We had a pricing trends report, a call for inputs about whether those at risk of disconnection require more protection and a report into the affordability of communications services. 

It is the last of those documents that I would like to delve into today. In regards to the pricing trends report and the call for inputs, these are very much ‘No faeces, Sherlock!’ moments. The trends in the market are obvious for all those participating in it, and there is already a robust statutory framework to protect those at risk for disconnection – the publishing of this report then suggests, Ofcom merely want to tweak the ‘consumer fairness framework’ it previously published. 

On affordability though, firstly let’s be very clear – digital social inclusion is very important. It was important before the pandemic; it was especially important during it and it likely to remain just as critical in the ‘new normal’. It is absolutely correct that the issue has some focus to ensure harm does not arise because choices are being made between food, heat or digital inclusion. 

Ofcom appears to be dissatisfied with the industry’s support for households on the lowest incomes. §1.6 of the report makes their sentiment clear;

“While the targeted tariffs currently available to consumers can help many low-income households that are struggling to pay, there remains more for industry to do”

A very simple question arises from this; if telecommunications services are so vital as to warrant affordable tariffs, then why is the Value Added Tax (VAT) set at 20%? Why is it 15% more than, say, on gas or electricity consumed by a residential premises?

Private enterprises, which have sunk millions, or even billions, into the infrastructure required to provide these services, often with little or no taxpayer subsidy, are being asked by Ofcom to cross-subsidise the provision of services to the less affluent from the custom of the more affluent, or from UK businesses. 

This is not the role of a sector regulator – the redistribution of wealth is very much, squarely, the exclusive role of our elected representatives in Parliament.

I am sure Ofcom will say that taxation is not within their remit, but they were very quick to cite section 3(1) of the Communications Act 2003 in the report to underpin the basis for writing it. This section provides Ofcom the statutory basis in relation to citizen-consumer interests and says;

“[It shall be the duty of Ofcom to] further the interests of citizens in relation to communications matters; and further the interests of consumers in relevant markets, where appropriate by promoting competition”.

Incidentally, the term ‘consumer’ in the Communications Act 2003 is defined to mean something other than you might immediately think, but let’s not go down that rabbit hole today. 

It is clear to me that Ofcom’s statutory remit enables it to engage fully with the relevant Government departments to seek a VAT reduction for telecommunications for the less well off. This becomes especially relevant considering that the United Kingdom’s exit from the European Union, as far as I understand, affords the government more freedom in VAT matters. This is far from a novel concept – one quick look at the different treatment of telecommunications in many states of the USA shows the idea has been implemented elsewhere. 

Given that telecommunications providers already screen applications for social tariffs (by reference to the customer’s universal credit or housing benefit status etc.), it should be no real skin off their nose to apply a different VAT rate and remit the lower amount to the Treasury. 

Instead, we have a situation where the regulator and the Government is happy to squeeze margins to the detriment of innovation, competition, and investment, while still guaranteeing itself a pound of flesh from the least well off. 

Treating telecommunications like electricity for the purposes of VAT (for the more economically vulnerable at least) would reduce their bills by 12.5% overnight. Yep, not 15%, ‘cos, apparently maths means that a 5% tax rate instead of 20% is equivalent to a 12.5% overall reduction – I’m confused too, but one of our chartered accountants worked it out. 

If I were one of the major household name operators currently holding out against Ofcom’s pressure (some are named and shamed in the report), I’d tell Ofcom to bodge off and speak to the Treasury – or at the very least make any affordable tariff launch contingent on some form of Government action.

The UK’s transposition of the European Electronic Communications Code does empower the Government to mandate that a social tariff be offered by all communications providers. Ofcom, it would appear, are doing their best to get the industry to avoid such a statist intervention. New sections 72D-72I of the Communications Act 2003 are the legal basis for this new power and also provide for a sharing of the ‘burden’.

“OFCOM may determine that contributions are to be made by communications providers to whom general conditions are applicable for meeting that burden. “

Given that BT have a disproportionate number of vulnerable customers, I would love to see the reaction of business providers and others that may be caught by a future general condition, being forced to write cheques to BT (whose diversification into sports TV they already subsidise through Ofcom’s calculation of charge controls), while the Exchequer still wants 20% in its trough. 

There is one saving grace though:

“OFCOM must not recommend the setting or modification of a social tariff condition unless they are satisfied that the condition or (as the case may be) the modification satisfies the test in section 47(2).”

Those that have had cause work with me on responding to consultations on proposed general conditions before will know section 47(2) well – it’s the proportionality test;

“[A general condition must be]

(a) objectively justifiable in relation to the networks, services, facilities, apparatus or directories to which it relates (but this paragraph is subject to subsection (3));

(b) not such as to discriminate unduly against particular persons or against a particular description of persons;

(c) proportionate to what the condition or modification is intended to achieve; and

(d) in relation to what it is intended to achieve, transparent.”

Any use of these social tariff powers would be a justiciable action, one where an appellate court, on the merits, would have to consider the proportionality of the action. I think someone might have a lot of fun in that situation. 

In the meantime, Mr. Sunak, it would be a lot easier and more efficient for everyone involved if you would lower the VAT on telecommunications to low-income households. I’d wait for the autumn statement, but I won’t hold my breath. 

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