On 14 May 2020, the European Court of Justice (ECJ) ordered the UK to amend its VAT rules relating to the trading of certain commodities. Here we briefly look at the background to the case, as well as the ECJ's reasoning and the possible implications for businesses affected by the ruling.
VAT rules in the European Union member states must generally mirror those found in the EU VAT Directive. However, member states may derogate from the VAT Directive in certain ways. In this case, the UK has been permitted to derogate from the Directive by applying a zero-rate of VAT to transactions carried out on certain commodity markets since 1977.
More specifically, under a Statutory Instrument called the Terminal Markets Order, exchange-traded derivative transactions in spot contracts and futures commodity contracts, including options on these contracts, are zero-rated for VAT purposes.
The measure, which was the subject of the case before the ECJ, concerned a so-called "standstill derogation," meaning that the measure cannot be extended by a member state in scope. According to the European Commission, the UK has made at least eight amendments to the derogation without notifying it of the changes. These amendments had the effect of no longer limiting the zero-rate to trading in the commodities originally covered.
In July 2018, the Commission requested that the UK bring these VAT rules back into line with the EU VAT law. After the UK failed to do so, the Commission referred the case to the ECJ in January 2019.
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The ECJ Ruling
In its decision of 14 May 2020, the ECJ ruled in favour of the Commission. The court found that the UK's failure to seek authorisation from the EU for new simplification measures that extend the zero-rating, and the exception to the normal requirement to keep value-added tax records, meant the country "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."
Implications of the ruling
The UK Government said on 15 May that it is reviewing the ECJ's decision. In its response, HM Treasury emphasized that the ruling will not mean that affected businesses face retrospective tax bills.
The Treasury said:
"The decision does not require businesses to pay any VAT on historic transactions, and the law applying to derivatives trades today means no VAT is due"
"That will remain the case while the UK considers next steps in the light of the ruling"