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DTI Document: Net Benefit: the electronic commerce agenda for the UK, October 1998


We stand on the threshold of a revolution in the way we do business. We cannot afford to underestimate the impact of electronic commerce on the global marketplace, or the important part it has to play in creating our vision of the UK of the future - a modern, knowledge-based economy.

The phenomenal speed of change poses huge challenges to business - the need to change working practices, open up new markets, create new products and new forms of distribution. In markets where the traditional model can be turned on its head overnight, where a business can move from start-up to global player in a matter of months, it is vital that all companies, whatever their sector of business, whether large or small, understand how electronic commerce can bring them competitive advantage - and use that knowledge.

Electronic commerce should bring enormous benefits to users - lower prices, greater choice, better access to information. Consumer confidence is essential in creating an environment in which electronic commerce will flourish. Business and Government must work together to help build consumer confidence, empowering consumers to take full advantage of the benefits on offer.

Our vision is clear - a UK which is at the forefront of demand for digital technologies from both business and individual consumers in Europe, a UK which is a leading digital economy, a UK which is recognised globally as providing a first-class environment for business to trade electronically.

Barbara Roche MP
Parliamentary Under Secretary of State for Small Firms, Trade and Industry
Department of Trade and Industry

October 1998

net benefit: the electronic commerce agenda for the UK

Electronic commerce - using an electronic network to simplify and speed up all stages of the business process, from design and making to buying, selling and delivery - is revolutionising the way business is done. This is, to a large extent, already the case within and between companies, and is just beginning between retailers and their customers.

It is beginning to affect performance in all areas of the economy. Those who use it most effectively will gain a crucial competitive edge: those who do not may not remain in business.

Making it easier for business in the UK, and world-wide, to use electronic commerce is therefore an important part of the strategy for creating the "knowledge-based economy" to which the UK Government is committed.

Government can help business and consumers to gain the benefits of using electronic commerce in three ways, by encouraging:

  • a strong demand from knowledgeable users
  • a strong supply sector providing innovative solutions to customer demands
  • the right legal, regulatory and institutional framework to allow electronic commerce to thrive

Wealth and jobs depend on knowing what your customer will buy and knowing how to pull together most effectively the people, finance, equipment and materials needed to meet that customer need. Business survival and success depend on having the know-how to put this together better than the competition.

Knowing how to get the most out of the emerging communications technologies is an increasingly crucial tool in that process - for improving efficiency within the business and for satisfying customers with the right products and services at the right time.

Electronic commerce in particular is already a key element in success for many businesses. It will rapidly become an essential element in the success or failure of many more. This is true for businesses of all sizes - Jack Scaife Ltd, a Yorkshire family butcher, uses the Internet to sell black puddings and traditional bacon throughout the world.

Electronic commerce draws businesses, suppliers and customers closer together - enabling for example collaboration between a UK firm, a technical expert in a US specialist supplier and the end customer in the Far East on the design of a complex machine tool.

Competition in the marketplace is driving the best businesses to address the challenge of new technology, pinpoint consumer demand, sharpen their marketing, tighten up their processes and explore the possibilities of new modes of distribution. They are increasingly demanding the same from their suppliers.

Governments can help by:

Electronic Procurement

Governments are major players in the market for goods and services - public purchasing amounts to 11% of European GDP. If Governments want to encourage electronic commerce, they need to set an example. Ambitious targets have been set in the EU. The European Commission has set a target of 25% of public procurement transactions to take place electronically by 2003, while the UK Government has announced targets of procuring 90% (by volume) of routine goods electronically by 2000/2001 and making 25% of Government services available on-line by 2001.

This policy was summarised by Ministers of the leading industrial countries (G8) when they met in Birmingham in the UK in May 1998 as:

"working with the international institutions and the private sector to offer the best opportunities for the future, a predictable and stable environment and a seamless, decentralised global marketplace where competition and consumer choice drive economic activity"

Prior to Birmingham the UK Government published "Our Information Age: the Government's vision" setting out a strategy for the UK and its citizens to benefit from the opportunities of the digital revolution. The purpose of this document now is to focus on the framework within which electronic commerce is developing.

Electronic commerce is particularly relevant to smaller businesses:

  The UK was at the forefront of telecoms liberalisation within Europe and now has one of the most competitive markets in the world, providing a firm infrastructure underpinning on-line business. The UK leads the world in some areas of technology (eg digital broadcasting) as well as in the delivery of certain on-line services (e.g. financial and business information) and is leading Europe in the use of the new technologies, but needs to close the gap with the US which has, for example, over double the percentage of households with PCs that the UK has.

63% of UK companies use E-mail, behind Japan (72%) and the US (65%) but well ahead of Germany (48%) and France (41%)

15% of UK households have PCs, equal to Japan, ahead of France (11%) and Germany (11%) but well behind the US (39%)

37% of UK companies have Web sites compared to Japan (45%), the US (41%), Germany (30%) and France (14%)

The proportion of the UK population on-line (10%) is well behind the US (21%), but ahead of Japan (6%), Germany (5%) and France (1%)

14% of UK companies use videoconferencing compared to Japan (16%), the US (15%), Germany (11%) and France (8%)

There are 16 Internet hosts per 1000 population in the UK, compared to 45 in the US, but ahead of Germany (11), Japan (8) and France (6)

Moving into the Information Age: An International Benchmarking Study 1998 (URN 97/147) prepared for the Department of Trade and Industry by Spectrum Strategy Consultants available at http://www.isi.gov.uk

  The following checklist of issues covers areas where the Government and its partners in business will need to co-operate to create both an environment of trust and security for users and a flexible, appropriate and non-burdensome framework for the development of electronic commerce.

building trust

Consumer Protection

Electronic commerce offers considerable benefits for consumers - the convenience of home shopping, a wider range of goods and services and lower prices, as well as improved access for disabled people, the elderly and those living in remote areas. However, consumers will not take advantage of these if they are not assured a proper level of protection. They must be confident that the on-line world is a safe place to shop.

Electronic commerce transactions are subject to the same framework of domestic and international rules as traditional means of shopping including, for example, existing rules on "distance selling" (such as mail order), advertising and consumer credit. Consumers need protection against fraudulent, misleading and unfair behaviour, and, when things go wrong, to be able to gain redress.

It will be necessary to keep the regulatory framework under review so that consumers have effective protection when engaging in electronic commerce. Self regulation may have an important role to play. As cross-border shopping increases there will be a growing need for international co-operation on questions of enforcement, dispute resolution and redress. Businesses, consumer organisations, governments and other bodies have significant parts to play in informing and educating consumers about how they are protected in the new marketplace.

Data Protection

Privacy is a key concern for users. The same technological advances which can bring benefits (eg profiling to create tailor-made products and services) can also be misused to infringe individual privacy.

While consumers need to be made aware of the potential risks of inadvertently divulging personal information and the steps they can take to safeguard their own privacy, this can never be the full answer as the subsequent use made of personal data collected legitimately during the processing of a transaction is equally important. Consumers need to be sure that such information once acquired will not be misused and for example sold on to a direct marketing organisation without their consent.

The UK's statutory approach is embodied in the Data Protection Act 1984, as updated by the Data Protection Act 1998. This legislation will ensure that personal data in the UK is:

The 1998 Act gives effect to the 1995 EC Data Protection Directive, the aims of which include establishing comparable levels of data protection within the European single market, thereby permitting the free flow of personal data. To protect the rights of European citizens, personal data may not be transferred to third countries outside the European Economic Area (EEA) which do not provide an adequate level of data protection. The Directive is flexible as to how adequate protection is achieved.

This flexibility is reflected in the approach being pursued within the Organisation for Economic Co-operation and Development (OECD), and is fully supported by the UK. Concerns about data protection must be addressed to ensure a high level of consumer participation in electronic-commerce. At an international level we need in particular to focus on ensuring adequate compliance procedures for traders and effective complaint and redress mechanisms for consumers in the event of abuse

Potentially Objectionable Material

Some classes of material are legal, and desired by some users, but expressly not desired by others. There is a risk that some users are put off using the Internet and engaging in electronic commerce because they fear unwanted exposure to offensive content.

The priority for the UK is to empower consumers to control their own experience of the Internet. In the case of content, this can be achieved by the use of rating systems which describe the content of a Web site objectively in accordance with a generally recognised scheme, and filtering software which enables the user to block access to Web sites according to their rating or if they are unrated.

The UK Government is encouraging parents to use the filtering tools available in the latest Internet browsers, which already include the software to filter rated material and exclude unrated material. Guidance made available for schools and teachers on the use of information and communication technologies in schools contains information on this. The UK Government also supports the deployment of the Platform for Internet Content Selection (PICS), and the development of ratings systems. The UK's Internet Watch Foundation (IWF - see Illegal Content and Associated Liability) has published a consultation document proposing requirements for an international ratings system. It has also helped to form European (INCORE) and international (Internet Content Rating Alliance (ICRA)) groups which aim to develop an internationally acceptable rating standard.

Authentication and Electronic Signatures

The widespread deployment and use of electronic commerce will be determined by the trust and confidence users have in the technology and the organisations providing services. The deployment of public key cryptography (electronic signatures) can help both to guarantee the integrity of information (any change is detectable) and link the information to a person, thereby preventing repudiation.

The UK Government proposes to introduce legislation to license (on a voluntary basis) organisations providing cryptography keys. This legislation will set standards for certification and guarantee legal recognition to electronic transactions facilitated by electronic signatures.

Agreeing international standards for electronic signatures and ensuring wide legal recognition is a high priority and the UK Government will continue to work towards this in relevant international fora.

Confidentiality Encryption

The need to safeguard confidentiality in electronic communications is essential, and there is a demand for encryption techniques to ensure this is met. Encryption, however, has a major drawback - the same technology used to protect sensitive business communications can be used by criminals and terrorists to circumvent the legal powers of interception by governments.

The dilemma is how to ensure that innovation and electronic business are not stifled while simultaneously taking law enforcement concerns into account. International debate continues to seek solutions which will support global secure electronic commerce.

In the UK, the Government is proposing to encourage the establishment of Trusted Third Parties (TTPs) where users of encryption keys could deposit their private encryption keys with licensed organisations which would provide legal access by law enforcement agencies. Introducing legislation to license such bodies will give both the public and business confidence that they are dealing with organisations providing professional key management and storage facilities.

creating the framework

Taxation Issues

  The UK Government is increasingly taking advantage of electronic methods of communication, information processing and payment in its relations with UK taxpayers.

The UK Government believes the following broad principles should apply to the taxation of electronic commerce:

At this stage there is no need for major changes to existing tax rules, or for the introduction of new taxes.

The UK is one of the driving forces behind work in the OECD on the tax issues raised by electronic commerce. The OECD is consulting with business and non-OECD members. Important technical issues under consideration include the definition of royalties for tax purposes in the context of electronic transmissions, the application of the principle of "permanent establishment" to the taxation of non-residents, and transfer pricing. The UK has been active in work undertaken by both the OECD and the European Commission that has been considering how best to apply Value Added Tax (VAT) to electronic commerce transactions.

The UK has actively contributed to and supports both the taxation framework conditions for electronic commerce developed by the OECD which are to be presented to its Ministerial conference in Ottawa in October 1998 and the principles for VAT recently agreed by European Finance Ministers. With regard to VAT, the main issues arise from the supply of services to private consumers, which at present is the least developed aspect of electronic commerce. Taxation in these circumstances should take place in the country of consumption.

The UK subscribes to the World Trade Organisation's (WTO) declaration on Global Electronic Commerce under which items ordered and supplied electronically will continue to be treated as "services" and thus be free of import duties but remain liable to VAT.

There is likely to be a substantial increase in the number of small packages imported as a result of electronic ordering. The UK has recently introduced new simplified import procedures to speed the importation of third country freight, including small packages, from outside the EU.

The UK will play an active part in international consideration of the application of betting and gaming duties to Internet gaming sites.

The Inland Revenue and Customs and Excise are working closely together and through the OECD to ensure that the UK tax base is adequately secured and that electronic commerce does not become a haven for tax avoidance and evasion.

The Inland Revenue and Customs and Excise joint paper on UK Policy on taxation Issues in electronic commerce contains more detailed information on the issues outlined in this document and can be found at http://www.nds.coi.gov.uk

Intellectual Property Rights

Advances in digital technology make the dissemination, use and copying of data ever easier. Without effective protection for the rights of suppliers of information, there would be no incentive to make works available on-line - there would be no global information society.

Effective copyright protection for the digital age is an essential part of the UK Government's goal of a predictable framework which will ensure the widest possible dissemination of copyrighted material without compromising the rights of suppliers. UK copyright law already provides a sound basis to meet the challenge of new technology, but some clarification and adaptation for the digital age will be required. International co-operation is of crucial importance. Work is already underway within the EU on a draft directive seeking greater harmonisation in the area of copyright and related rights, but the key to these issues lies in wider international harmonisation of copyright law.

The UK will continue to play a leading role internationally, as it did in the successful conclusion of two World Intellectual Property Organisation (WIPO) treaties agreed in December 1996 which will give a boost to the protection of intellectual property rights world-wide, particularly in digital and on-line services. The Government is working within the EU to ensure the early ratification of these treaties.

Work on intellectual property rights is clearly seen as an important part of the comprehensive work programme on electronic commerce agreed at the second WTO Ministerial Conference in May 1998. Discussion on the existing WTO TRIPs (Trade Related aspects of Intellectual Property rights) agreement which provides binding and enforceable multilateral rules for the protection of intellectual property rights will need to focus on the extent to which these rules need to be revised to take account of electronic commerce, particularly the new WIPO treaties.

Illegal Content and Associated Liability

The law should apply on-line as it does off-line. On-line content must comply with laws on for example obscenity or copyright just as content in traditional media must. Liability for illegal material when identified is a key issue.

In the UK, individuals and enterprises are responsible for their own conscious acts and omissions on-line as they are off-line. Primary responsibility for illegal material on the Internet would clearly lie with the individual or entity posting it. Under UK law, however, an Internet Service Provider (ISP) which has been made aware of the illegal material (or activity) and has failed to take reasonable steps to remove the material could also be liable to prosecution as an accessory to a crime.

Clarification of the liability of ISPs has been addressed by collaboration among UK industry, Government and the police. The Internet Watch Foundation (IWF) has been established and service providers have signed an industry code of conduct. Compliance with this code of practice (essentially the removal of material from their UK servers following IWF notification) would likely be taken in court as evidence of the ISP having made reasonable efforts to comply with the law.

Internet Watch Foundation(IWF)

The IWF provides a hotline for Internet users to report material which they believe may be illegal. Following its own assessment, the IWF then notifies the service provider and the police if the material is hosted on a UK server, or the relevant law enforcement contact if it is hosted abroad.

The focus of the IWF hotline is child pornography, but it has also dealt with other types of illegal material and a review of the IWF currently underway will suggest possible future priorities. The IWF framework could be potentially useful for removing a range of forms of illegal content/material.

The IWF's brief also covers rating and filtering of illegal material and it is currently working with European and international partners to develop an internationally acceptable rating system.

International co-operation and co-ordination will be essential in tackling issues of illegal content when material held to be illegal in one country is located on a server in another. Where both countries share a common approach to the illegal material existing international judicial co-operation procedures can be brought into play.

More difficult is the situation where material or actions deemed illegal in one country are legal in another. This can only be overcome by reaching international agreement in key areas on what constitutes illegal material or actions. Copyright and related rights is one area where international agreement has already been reached on what constitutes an illegal action (the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty).

The EU Action Plan - promoting the safer use of the Internet

  • The UK strongly supports this action plan which aims:
  • to encourage the development of national self-regulatory systems for the Internet throughout the European Union
  • to develop filtering and rating systems for Internet content
  • to alert and inform parents and teachers of the means available to protect children from harmful material
  • to foster co-operation and the exchange of best practice
  • to promote co-ordination between Member States, for example by the creation of a Europe-wide network of hotlines for reporting illegal material on the Internet.

Technical Standards

Interoperability of myriad systems (both hardware and software) and interconnectivity across networks are self-evident prerequisites for a global on-line infrastructure. Similarly, with firms increasingly transmitting large amounts of data across networks and conducting business electronically without prior contractual agreement, standards for business data transfer are more important than ever before.

The UK believes that voluntary, consensus-based standards, preferably agreed at an international level, for both the IT infrastructure and messaging are the only way forward.

While industry obviously has a key role to play, and the reality of some market-driven product standards will have to be recognised, the alternative - to allow the development of competitive proprietary standards - naturally favours strong market leaders and can seriously distort competition and create barriers to trade.

The UK is therefore committed to supporting standards bodies in their work in this area, in particular encouraging them to respond quickly to trade priorities.

Telecoms Infrastructure

Without widespread availability of speedy access infrastructure, high quality of service within the backbone network, and affordable prices, electronic commerce will remain the province of the few. The UK believes that these conditions are best achieved through effective competition, both nationally and internationally.

The UK is pursuing competition in the provision of both infrastructure and services. While users' primary concern might be with effective competition in services, this is only sustainable in the long run when supported by effective competition in infrastructure.

The UK already has one of the most liberalised markets for telecommunications in the world and the development of competition in the UK market is reflected in the real benefits that have flowed through to consumers. These benefits include choice of service and supplier, quality of service and lower prices.

That said, prices for leased lines - a key input for some firms offering on-line access and services - are still far too high in Europe in comparison with the US. The effects of the liberalisation of most EU markets at the beginning of 1998 are still feeding through, but the UK Government is concerned that prices are not moving as quickly as might have been expected. The UK has raised the issue with the European Commission and will follow developments closely. In the UK , OFTEL, the independent telecoms regulator, is carrying out a competition investigation into the market for national private circuits.

Electronic Payment Systems

The majority of transactions made over the Internet at present use existing payment products such as credit card numbers, sometimes in conjunction with encryption. They are processed in the same way as any other remote card payments and do not raise new public policy issues.

For electronic commerce to thrive, new and easier forms of electronic payment will be necessary. Current alternatives being developed include electronic money, i.e. prepaid digital tokens representing monetary value, which are stored as data on a smart card or in a computer's memory. These tokens can be passed over the Internet or other networks as payment, and eventually redeemed by the recipient .

The lack of universally-agreed standards for electronic money products may slow their development as an alternative payment method. Other issues for governments to consider include prudential and monetary policy concerns, the potential for fraud, tax evasion, money laundering, and concerns about the security and integrity of the technology.

The UK believes that any regulation must be proportionate to the risks presented and while systems remain small, they are unlikely to pose a major threat to financial or monetary stability. Disproportionate or badly-targeted regulation in the early stages of electronic money schemes could discourage their further development, while premature or incomplete regulation could distort the market or only catch certain varieties of electronic money.

Internet Domain Names

Domain Names (e.g. dti.gov.uk) are a user-friendly form of the unique numeric Internet Protocol (IP) addresses which link computers to each other on the Internet.

The registration of domain names raises a large number of complex issues, most of which are closely related to the commercial practices in the industry and are best addressed by the industry itself.

The UK therefore welcomed the US White Paper published in June 1998 which set out proposals for transferring control of the management of the Internet from the US Government to a private sector body which would, once constituted, address issues such as dispute resolution and whether to create new domain spaces. This reflected the primary concerns of the UK and other EU Member States, as expressed by the European Commission, in particular that this private sector body be fully representative of all Internet stakeholders both geographically and functionally.

Trade Facilitation

Most international trade procedures are neither simplified nor harmonised nor IT-based. Trade facilitation is the rationalisation and simplification of these procedures, including their computerisation.

Electronic commerce will generate a large increase in small volume importation by consumers and small and medium-sized enterprises (SMEs) of goods ordered electronically from overseas suppliers, a development which could be hindered in countries that do not have streamlined trade procedures (for example for declaring and collecting customs duties).

The UK is currently trialling electronic equivalents for key export documentation to provide Government and business with the flexibility to exchange paper documents and their electronic equivalents at any time, thus allowing for electronic working without excluding those who lack IT capability.

The UK Government is committed to co-ordinated global action on both trade facilitation and electronic commerce and fully supports the efforts being made by the European Commission in this area.


  Electronic commerce has huge potential for all of us but there are barriers to be overcome before that potential can be fully realised. Some of these can be best addressed by business, and many businesses are already investing heavily in finding ways to overcome them. Others need to be addressed by both Government and business, such as boosting consumer confidence in the on-line environment. Yet others are primarily the responsibility of Government, such as the protection of intellectual property rights, setting an example in procurement practices and addressing tax and data protection issues. This Government is fully committed to taking the lead internationally in reaching practical, effective solutions. We need an electronic commerce framework which gives businesses certainty while remaining flexible enough to cope with technological and business change, and encourages rather than stifles innovation.

Government cannot achieve this alone - we need to work in partnership with other stakeholders. This document has set out some of the ways this is happening - but in a rapidly changing environment new ideas for collaboration in this area are welcome. If you have any such suggestions, please e-mail them to: ecom@ciid.dti.gov.uk

or write to:

Neil Feinson
Communications and Information Industries Directorate,
Department of Trade and Industry,
151 Buckingham Palace Road,
London, SW1W 9SS.