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EU Commission challenges UK’s VAT treatment of trading on certain UK commodity markets

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What has happened?

Following the UK Treasury’s press release on 9 March 2018,  the EU Commission has published its own statement relating to its complaint about the UK’s VAT treatment of certain commodity derivatives, trading on terminal markets. The EU has set out its complaint against the UK, in a “letter of formal notice” dated 8 March 2018, pursuant to Article 258 of the Treaty on the Functioning of the European Union.

What is the issue?

UK legislation (the Value Added Tax (Terminal Markets) Order 1973 (the “TMO”)) allows a specific VAT zero-rate for derivative transactions in spots, futures (and options on) commodity contracts, when traded on an exchange. The EU Commission says that the derogation permitting this special VAT zero-rate has been considerably extended. It is alleged, by the EU Commission, that the scope of the UK’s special VAT regime is no longer just limited to trading in commodities originally covered by the derogation. The Commission alleges that this is a breach of EU VAT law and is generating major distortions of competition to the detriment of other financial markets within the EU.

What does this mean?

The Commission’s action does not have any immediate affect and the UK VAT law still stands and applies. The UK Treasury’s press release was at pains to point out that this is the beginning of infringement proceedings against the UK and that the UK VAT law will continue in force unless and until such time as it is changed. The Treasury has stated that past and current trading activity under the TMO is not affected by the Commission’s formal letter.

The UK has two months to respond to the Commission’s letter and will set out its views.

What should we be doing?

If your business applies the VAT regime in accordance with the TMO, you should consider what impact it may have if the Commission’s complaint succeeds. The letter of formal notice is not a public document but it appears from the EU Commission’s press release that it is attacking the UK’s extended scope of the derogation. If you would like to discuss how we may be able to help you influence this issue please contact your usual contact or one of our key contacts below.