U.K. Ordered to Defend VAT Treatment of Commodity Derivatives

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By Ali Qassim

The European Commission is threatening to take the U.K. to the bloc’s highest court unless it can defend, within two months, its policy to charge no value-added tax on transactions of commodity derivatives.

The commission July 19 sent a “reasoned opinion” to the U.K.—as part of formal legal proceedings—over a VAT exemption permitted for certain commodity derivatives.

Commodity derivatives are investment tools that allow investors to profit from certain items without possessing them. The U.K. doesn’t charge VAT on derivative transactions in spots, futures, and options on commodity contracts when traded on an exchange.

The commission’s action marks the second stage of its infringement procedure following the failure of Her Majesty’s Treasury to respond to a March 8 letter of formal notice from the commission, asking the U.K. to submit its observations within two months.

The U.K.’s existing policy was created under the Terminal Markets Order, a statutory instrument that allows a specific VAT zero rate for derivative transactions in spots, futures, and options on commodity contracts when they are traded on an exchange.

Since the commission was notified in 1977 of the U.K.’s derogation, the U.K. “has extended the scope of the measure considerably, meaning that it is no longer limited to trading in the commodities as originally covered by the derogation,” a commission spokesman told Bloomberg Tax in a July 19 email.

In a July 19 statement, the Treasury said the commission’s latest action “is part of the normal infraction process and was anticipated,” adding that it “will respond in due course.”

The Treasury also said the “legal position” regarding the U.K. tax treatment of commodity derivatives won’t change and that current trading activity under the TMO isn’t affected.

Court Threat

The European Commission issues a reasoned opinion when a member nation’s observations “fail to persuade the Commission to change its point of view” or if the member nation doesn’t respond to the request, according to the commission’s Taxation and Customs Union department. The opinion grants the U.K. Treasury a further two months to make a formal response.

The spokesman said that “if the UK does not act within the next two months, the commission may refer the case to the European Court of Justice.” The ECJ’s judgment is binding, according to the commission.

U.K. Derogation Uncompetitive

As stated in the European Union’s Value-Added Tax Directive (2006/112/EC), the standard rate of VAT to be applied by all EU countries to goods and services is at least 15 percent.

Under these rules, “this type of ‘standstill’ derogation cannot be extended in scope,” the spokesman said.

The commission’s main argument against the U.K.’s continued derogation is that it “generates major distortions of competition to the detriment of other financial markets within the EU.”

The EU’s largest commodities exchanges—Intercontinental Exchange and the London Metal Exchange—have key locations in London.

To contact the reporter on this story: Ali Qassim in London at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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