THE European Commission is investigating allegations that BT is receiving illegal state aid, after a complaint that the former monopoly saves more than £1 billion a year in business rates through a favourable deal with the Inland Revenue, The Times has learnt.

If Brussels upholds the complaint, the telecoms group will have to tear up the one-off agreement, which covers the past eight years, and repay the money it has saved, which runs into billions of pounds.

The Commission is investigating a charge that BT’s rates bill is calculated at a rate of 2 per cent of relevant revenues, while rivals pay up to 27 per cent.

The complaint, by Vtesse Networks, alleges that BT saved more than £1 billion on its rates last year. The company, which provides high-capacity networks for City financial institutions, charges that BT paid rates on its telecoms network equivalent to just £250 million during 2003.

Vtesse claims that BT’s bill would have been £1.39 billion if the telecoms giant had been assessed by the same formula applied to its own business. BT’s formula was established nine years ago in an out-of-court settlement on the basis that the company was a “unique national institution” requiring a tailor-made rates assessment.

The formula is based on BT’s share of the telecoms market and a valuation of its entire communications network.

Adian Paul, chief executive of Vtesse, said: “I think it is not surprising that we have a situation in which BT’s market share is as high as it is when you have discriminatory taxes.”

Last night the Office of the Deputy Prime Minister, which handles business rates matters, confirmed that it had received a letter from the European Commission and was “considering its response”.

Business rates in the UK are set by the Valuation Office Agency (VOA), an agency of the Inland Revenue. For telecoms groups, the agency typically pegs the business rate to the value of the network that the company uses.

Companies such as Vtesse are assessed using the amount they pay to rent fibre optic networks from cable providers.

The VOA admitted yesterday that it does not apply such a rental formula in assessing BT and that a unique structure is used instead.

Vtesse said: “This differential taxation for the same or equivalent transactions constitutes ‘state aid’, is illegal and breaches both English and European law.”

The Department of Trade and Industry has been conducting a review of the apparent disparity between what BT and other telecom companies have to pay in business rates.

Another telecoms company said: “These issues are a concern in relation to the health of broadband Britain and competition in the marketplace.”

BT said it had not received anything from Brussels or the Government and was happy with present VOA practice.