European Commission investigating whether UK taxes commodities trades adequately

The European Commission is investigating whether the United Kingdom imposes enough tax on commodity derivative trades, according to the UK Treasury.

The Commission issued a “letter of formal notice” in the first stage of what is known as an infraction process, which allows it to sue European Union member states if they fail to adhere to EU law.

The letter sets out the Commission’s initial views on the UK’s value-added tax (VAT) treatment of certain exchange-traded commodity derivatives, and gave the UK government two months to respond.

Since 1973, commodities derivatives traded on a UK exchange have been exempt from VAT as a result of the Terminal Markets Order, a statutory instrument for derivative transactions in spots, futures and options on commodity contracts.

The UK government said it will consider the Commission’s views and will respond in due course.

“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 UK government added.

The move, which comes ahead of Britain’s exit from the EU next year, would impact key commodity exchanges in the UK such as the London Metal Exchange and the Intercontinental Exchange.

“We note the EU Commission’s commencement of infraction proceedings and we are monitoring the situation closely,” a spokeswoman for the LME said.

“We understand that the proceedings do not have any immediate effect on UK tax law, therefore, the tax treatment of LME derivatives remains unchanged,” she added.

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