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European Court Rules Against UK on VAT Treatment of Futures Trading

Charles Riordan
June 4, 2020

In the midst of ongoing negotiations following the UK’s exit from the European Union (EU), the Court of Justice of the European Union (CJEU) has ruled that the UK has impermissibly expanded the scope of its 0% VAT rate on futures trading.  And, that this has been occurring over a period spanning more than forty years. While this ruling doesn’t overturn current UK policy – as affirmed in a subsequent statement from HMRC – it does require the UK to seek authorization from the European Commission to continue applying it. How and when the UK will comply with the judgment, and what the Commission’s response will be, adds to the current uncertainty for businesses operating in the UK.

Case C-276/19, European Commission v United Kingdom of Great Britain and Northern Ireland, stems from breach proceedings brought by the European Commission in March of 2018. But the roots of the dispute arose decades ago. In 1977, the UK told the Commission that it intended to maintain zero-rating for eleven “terminal markets”, on the basis that the futures trading conducted were not transactions in goods, but instead “of the nature of financing or insurance.” Following that notification, zero-rating was expanded beyond the original eleven markets (later additions included trades in gas and electricity, for example). The CJEU found the UK’s justification for the additions – that they were in response to a restructuring in the London commodity markets – unconvincing, given that some of the changes involved newly existing transactions such as trading in carbon emissions allowances.

The political implications

The political implications of the CJEU’s judgment are unclear, but what is known is that the UK must:

  1. Pay the Commission’s legal costs, and
  2. Seek authorization to continue applying the zero-rate to any transactions added to the UK legislation since 1977.

The CJEU did note that nothing in its judgment addressed the question of whether the Commission should grant authorization. Meanwhile, HMRC has stated it will be reviewing the decision and that the current rules apply for the time being.

The ruling is likely to increase tensions between the UK and the EU in the run up to the end of the Brexit transition period on 31 December 2020. Whether both sides can reach an ongoing trade agreement to include a resolution of this issue remains to be seen. Affected businesses should watch HMRC announcements for updates.  

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Charles Riordan

Charles Riordan is a member of the Regulatory Analysis team at Sovos specializing in international taxation, with a focus on Value Added Tax systems in the European Union. Charles received his J.D. from Boston College Law School in 2013 and is an active member of the Massachusetts Bar.
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