EU infringements proceedings in relation to UK VAT treatment of commodity derivatives

The EU Commission is stepping up its infringement proceedings against the UK in relation to the application of zero-rating to certain transactions in commodity derivatives under the Terminal Markets Order.

The EU Commission has decided to refer the UK to the ECJ over its VAT treatment of certain commodity derivative transactions traded under the Terminal Markets Order (TMO). The Commission has announced that it considers that the UK VAT rules are contrary to EU law as they exceed the terms of the original derogation granted to the UK in 1977 that forms the basis of the TMO.

London is one of the centres for international trade in commodity derivatives and the UK VAT rules currently provide for zero-rating of a broad range of transactions in commodities and commodity derivatives. Any changes to these rules would impact on financial traders and funds trading or investing in such financial products.


The TMO is a Statutory Instrument that allows trades in certain commodities and also certain derivatives over commodities (such as spots, futures and options) when traded on a listed market to be zero-rated for VAT purposes.

The TMO zero-rates actual transactions between two market members in commodities which result in the goods being delivered, provided that the market is a listed terminal market such as the London Metal Exchange, the London Bullion Market, the London Platinum and Palladium Market or the London Rubber Market. However, the TMO also covers commodity derivative trades. For example, zero-rating also applies to futures transactions in commodities ordinarily dealt with on a listed market either between two market members or a market member and a non-member, provided the transactions do not lead to a physical delivery of the goods. In addition, the grant of an option over a commodity exercisable on a future date is zero-rated provided the commodity is ordinarily dealt with on a listed terminal market. This is regardless of whether it is between two market-members or a market-member and a non-member.

In addition, the TMO also zero-rates supplies by certain intermediaries of arranging zero-rated transactions between members of a listed market which itself would be a zero-rated supply.

EU infringement proceedings

On 08 March 2018, the EU Commission provided notification of infringement proceedings against the UK in respect of this VAT treatment of commodity derivatives. The UK received a “letter of formal notice” from the EU Commission pursuant to Article 258 of the Treaty on the Functioning of the European Union (TFEU). This is the first stage of an infraction process. The letter set out the Commission’s initial views on the UK’s VAT treatment of certain exchange traded commodity derivatives, and invited a response from the UK Government within two months.

Since, according to the Commission, the UK has failed to “bring its legislation into line with EU VAT law following the issue of the Commission’s reasoned opinion”, the Commission has now decided to refer the UK to the ECJ. This is the second stage of the infraction proceedings.

Whilst full details of the infringement proceedings by the EU Commission have not been published, the Commission has indicated that it considers that the UK has illegally extended the scope of the original 1977 derogation under which transactions carried out on named commodity markets in the United Kingdom could be zero-rated, such that it is no longer limited to the commodities originally covered by the derogation. It seems likely that the Commission considers that commodity derivative trades should be exempt from VAT, such that there should also be a restriction on the input VAT recovery of traders dealing in such commodity derivatives.

HM Treasury originally stated that the UK Government would consider the Commission’s views and respond in due course, though no formal response has been published. In the meantime, the UK VAT treatment of commodity derivatives remains unchanged. UK VAT law stands unless and until such time as it is changed and therefore past and current trading activity under the TMO is not affected by the issuance of the Article 258 letter.


The decision of the Commission to challenge the UK’s VAT treatment of commodity derivative trading shortly before Brexit will, no doubt, be politically sensitive. Should the draft Withdrawal Agreement between the UK and EU enter into force, then it seems likely that the infringement proceedings (if successful) would require the UK to change the relevant VAT rules to bring them into line with EU law, since Article 131 of the Agreement provides for the continuing right of EU institutions to exercise the powers conferred upon them by Union law in relation to the UK.

However, it should be noted that, unlike EU State Aid cases where the benefits of the State Aid can be recouped from the taxpayers which benefited, there is no basis on which infringement proceedings can lead to a retrospective change and a repayment of benefits obtained by taxpayers.

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