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European Commission launches proceedings over UK tax treatment of commodity derivatives

The European Commission has launched infraction proceedings against the UK in respect of VAT treatment of certain commodity derivatives traded under the Terminal Markets Order (TMO).12 Mar 2018

The TMO is a statutory instrument allowing a specific VAT zero rate for derivative transactions in spots, futures, and options on commodity contracts, when traded on an exchange. 

Last week the European Commission sent a letter of formal notice to the UK, known as an Article 258 letter, setting out its initial views on the country's VAT treatment of certain exchange-traded commodity derivatives. The UK hosts two large commodities exchanges – the London Metal Exchange and ICE Futures Europe – but the TMO applies also to transactions between other smaller markets trading in commodities such as food and precious metals.

In a statement the UK government said it would consider the Commission's views and would respond “in due course”. It has two months to make its response.

“The issuance of the letter does not have any immediate effect on UK tax law and the matter will be subject to the normal infraction process, which is open to challenge,” the government said.

“The tax treatment of commodity derivatives is unchanged. UK tax law stands unless and until such time as it is changed and therefore past and current trading activity under the Terminal Markets Order is not affected by the issuance of the Article 258 letter,” the government said.

Until the UK leaves the EU in March 2019 it is subject to EU rules on taxation, which require a minimum VAT level of 15%. Soon after the vote to withdraw from the UK experts from Pinsent Masons, the law firm behind, said Brexit could see the end to “recurring threats” from the European Commission to take away the TMO's zero rating.