Freeserve yesterday claimed a small but significant victory in its long-running battle with AOL, the rival internet service provider it claims has been given a £100m advantage by not having to pay VAT.

A judge ordered a judicial review of customs and excise's decision to exempt AOL from paying value-added tax.

Freeserve moved its Anytime service to Madeira, where VAT is charged at 13% rather than the 17.5% levied in the UK, in retaliation.

AOL has, Freeserve says, been given an unfair competitive advantage as the savings can fund customer offers Freeserve cannot match.

"We find it extraordinary that we should even need to undertake this action when this is money to which the UK government is already entitled," a spokeswoman said.

A spokesman for AOL said that even if judicial review establishes that customs used incorrect information in exempting AOL, that will not be the end of the matter.

Customs would have to re-open the issue - on which it ruled in 1997 that ISPs not based in the EU should be treated as content providers and exempt from VAT, rather than as telecoms companies which are charged.

The issue will be resolved next July when new rules will require AOL to register as a business in an EU state and pay the tax.