Thank you, this actually sheds light at the problem. In the POST string the shop sends to PayPal there is, as you said, tax=0.00. This tax override applies to the line item in the cart and the shipping. However, handling_cart=1.00 encompasses the entire cart and variables affecting only the line item won't have any effect on it. Therefore, the rate from your PayPal account is applied to handling_cart.
Try with and without handling_cart:
https://www.paypal.com/cgi-bin/webscr?add=1&cmd=_cart&business=9L6N28NFAYNHQ&item_name=Test_item&item_number=ISK-001&amount=10.00&shipping=1.65&tax=0.00¤cy_code=GBP&handling_cart=1
https://www.paypal.com/cgi-bin/webscr?add=1&cmd=_cart&business=9L6N28NFAYNHQ&item_name=Test_item&item_number=ISK-001&amount=10.00&shipping=1.65&tax=0.00¤cy_code=GBP
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