UK VAT on Commodity Derivatives Trading – A Matter for the EU Court?
The UK government is reportedly prepared to resist the European Commission’s challenge in the Court of Justice of the European Union (CJEU) over the UK’s VAT treatment of commodity derivatives trading.
The Commission has issued a formal notice of infraction proceedings (dated 8 March 2018) as well as a reasoned opinion (dated 19 July 2018) to the UK. Both communications are pursuant to Article 258 of the Treaty of the Functioning of the European Union (TFEU), and concern Article 394 of Directive 2006/112/EC (the VAT Directive) on derogations related to certain commodity derivatives trading under the Terminal Markets Order 1973. This Order is a statutory instrument that permits for exchange-traded derivative transactions in spots, futures and options on commodity contracts to be zero-rated for UK VAT. The zero-rating of these transactions is a permitted special measure under Article 394, which allows Member States to simplify VAT collecting rules. The Commission takes the view that the development of the UK’s zero-rating treatment of such transactions now contravenes EU VAT rules, and requests that the relevant UK VAT rules should be aligned with EU rules.
The March formal notice referred to the UK’s extension of the scope of a VAT derogation that consists of zero-rating transactions carried out on a number of commodity markets. The Commission contends that since the UK notified that derogation to the Commission in 1977, the UK has considerably extended the scope of the measure, which is no longer limited to trading in the commodities originally covered by the derogation. The Commission further holds that the extension of the scope of such a ‘standstill’ derogation is not permitted under EU law. The Commission adds that the derogation is also generating ‘major distortions of competition to the detriment of other financial markets within the EU’, following some informal complaints from other Member States.
As the UK did not act within the stipulated two months since the date of the formal notice, in line with procedure the Commission has now sent a reasoned opinion to the UK government. For the time being and pending any legislative changes, the UK’s tax treatment of commodity derivatives remains as before. However, if the Commission considers the UK’s response to its communications to be insufficient, it can bring the matter before the CJEU.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).