UK VAT on Commodity Derivatives Trading – A Matter for the EU Court?

19 September 2018
Author: Sabina Manea

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.

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