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UK loses VAT commodity trading European Court of Justice ruling

  • May 14, 2020 | Richard Asquith

The European Commission (EC) won its case against the UK at the European Court of Justice concerning the zero-rating of certain commodity trading.

The UK will have to meet EC costs of the loss. The court could impose a fine on the UK, but is unlikely to do so. The decision does not require businesses to pay any VAT on historic transactions. That will remain the case while the UK considers next steps in light of the ruling.

Whilst the UK has left the EU on 31 January 2020, it must still abide by ECJ rulings until the end of the transition period, 31 December 2020.

VAT derogation exploited by UK

The scope of UK zero-rating commodity trading was limited by the EU in the 1970s. However the UK has since incrementally broadened the scope within its own VAT Act over the years on terminal market commodity trading to include trading commodity options and futures contracts. It did not seek additional authorisation from the EC for these changes. The EC argued that this stealth widening of the exemption has given the UK an unfair tax advantage over other EU member states.

This includes two sectors where London is the leading global marketplace:

  1. Terminal Markets - London Metal Exchange, International Petroleum Exchange of London, Potato Futures Market, the London Securities and Derivatives Exchange, the London Bullion Market, the London Platinum and Palladium Market or the London Rubber Market; and
  2. Commodity derivative trades with no physical delivery of goods.

The UK argued that it is in line with EU “standstill” rules that allow the zero rate because it was applied before a 1977 cut-off date. It maintains that the contested amendments did not substantively extend the derogation authorised pursuant to the notification of 28 December 1977 beyond the scope or purpose of that notification.

In its judgement, the ECJ ruled:

"Declares that by introducing new simplification measures that extend the zero-rating and the exception to the normal requirement to keep value added tax records which were provided for in the Value Added Tax (Terminal Markets) Order 1973, as amended by the Value Added Tax (Terminal Markets) (Amendment) Order 1975, without submitting an application to the European Commission with a view to seeking the authorisation of the Council of the European Union, the United Kingdom of Great Britain and Northern Ireland has failed to fulfil its obligations under Article 395(2) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax"

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.
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