The UK could be fined by the EU for failing to comply with internet privacy legislation.
The European Commission begun infringement proceedings against the UK last year over how EU law was implemented during trials of the targeted advertising service from Phorm on BT's networks. The EU started the investigation following a number of complaints from British web users about the trials.
Phorm's service, which is known as Webwise, tracks users' online surfing habits and then delivers relevant adverts. The trials took place in 2006 and 2007 without users's knowledge and subsequently raised concerns that web users should have been given the option to opt-out of the trial.
According to the European Commission, this breaches personal data protection rules that require consent to intercept any emails or web activity.
The Commission has now referred the case to the European Court of Justice.
"We are planning to make changes to address the Commission's concerns and will be setting out more detail on any necessary amendments or legislation in due course," a spokesman of the UK Home Office said.
The Open Rights Group, which was among the organisations that complained to the EU, said announcement was "great news".
"Phorm showed there are big holes in the UK privacy laws. We need an official body to deal with citizens' complaints about illegal commercial interception and enforce our legal privacy rights," said the group's director Jim Killock.
See also: Phorm issues new shares to raise cash