The UK government lost its legal battle against Brussels over the EU’s attempts to force it to raise taxes on trading commodity derivative, hitting the City of London’s competitiveness hard following the judgement against the UK, on 14th May 2020, where the ECJ decided that the UK had failed to carry out its obligations under the Article 395(2) of Council Directive 2006/112/EC (Directive) due to it failing to notify the Commission (European Commission), and receiving authorisation from the Council of the European Union, when it altered the list of terminal markets in which commodity derivatives trading is for VAT purposes, zero-rated.
The European Commission’s belief is that the exemption had, over many years, been stretched much wider than was originally planned as markets evolved, with traders being able to avoid VAT on commodity options, spot transactions and future contracts in the London Rubber Market, the London Cocoa Terminal Market, London Metal Exchange, London Coffee Terminal Market, London Vegetable Oil Terminal Market, London Wool Terminal Market, London Sugar Terminal Market, London Silver Market, Liverpool Barley Futures Market and the London Grain Futures Market.
However, Britain has defended its stance as within the EU “standstill” rules which allow the zero rate because it was in place in the UK prior to January 1977. Brussels and the UK have been at loggerheads over the issue since March this year, coinciding with the first time that the Commission made its concerns known.
Formerly Article 27 of the Sixth Council Directive, Article 395 of the Directive states that the Council may give member states permission to introduce special measures derogating from the Directive to simplify make the procedure for collecting VAT. Member states who wish to introduce these measures must apply direct to the Commission. In 1977, the UK told the Commission of special measures that were in force from 1st January 1977, including the VAT (Terminal Markets) Order 1973 (SI 1973/173) (amended by the VAT (Terminal Markets) (Amendment) Order 1975 (SI 1975/385)). From 1980 to 1999, the Order was amended numerous times to remove and add certain terminal markets.
The ECJ insisted that national derogations must be strictly interpreted. It discovered that the amendments were substantial enough to be consisted as new special measures for the derogation. As a consequence, applying Direct Cosmetics v Commissioners of Customs and Excise (Case C-5/84) EU:C:1985:71, they required the UK to notify the Commission of such amendments. The ECJ shed light that the notification obligation doesn’t prejudice as to whether or not the Council would approve the amendments in any future decision. The Judgement itself is also a clear reflection of EU sensitivities around the City having financial advantages inbuilt over other European financial centres.
The tax treatment of commodity derivatives remains unchanged. UK tax law will stand unless and until such a time as it is changed, therefore current and past trading activity under the Terminal Markets Order is not affected and the decision doesn’t need businesses to pay Value Added Tax to HMRC on historical transactions and the law which applies to derivatives trades will continue to apply so that no VAT shall be due.
The UK has formally left the EU and may not be subject to EU rules on taxation, continuous threats from the European Commissions to take away the Trading Markets’s zero rating should not be influenced by CJEU. Continue trading as normal the domestic tax treatment of commodity derivatives stands unchanged.
