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Infringement proceedings against the UK on Customs Duties and VAT

Infringement proceedings against the UK on Customs

Details have emerged of Commission infringement proceedings regarding UK Customs Duties and the VAT treatment of certain commodity markets.

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Director and Brexit Customs & Indirect Tax Lead

KPMG in the UK

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Details have been published by the European Commission and HM Treasury providing confirmation of two letters sent to the UK as part of the first stage of infringement proceedings. The first concerns the UK’s refusal to make customs duties available to the EU Budget. This relates to what the Commission describes as evasion of customs duties by importers of certain goods from China. The Commission calculates the value between 2011 and 2017 as being EUR 2.7 billion (minus collection costs). HM Treasury has also acknowledged that another letter has been received from the Commission in relation to the UK’s VAT treatment of certain commodity derivatives.

On 8 March the European Commission published details of its March infringements package. In its fact sheet, under the first heading ‘Budget and Human Resources’ the Commission sets out the UK’s refusal to make customs duties available to the EU Budget. The document refers to the UK being informed of the risks of fraud relating to the importation of textiles and footwear originating in China since 2007. It adds that despite having been asked to take appropriate risk control measures, the UK failed to take action to prevent the fraud. At the end of the section, the Commission added that the UK had also infringed EU VAT legislation, leading to potential losses to the EU budget and that the UK is liable for the financial consequences for its infringements. No further details were given.

However, the following day, HM Treasury issued a statement entitled ‘Statement on infraction proceedings on VAT of certain commodity derivatives trading’. This suggested that the proceedings against the UK were in respect of the VAT treatment of certain commodity derivatives, trading under the Terminal Markets Order (TMO). The TMO is a Statutory Instrument that allows a specific VAT zero rate for derivative transactions in spots, futures (and options on) commodity contracts, when traded on an exchange.

Subsequently the Commission posted a short news story, which states the letter concerns the UK extending the scope of a derogation that zero rates transactions carried out on eleven named commodity markets. It adds, that since notifying its derogation in 1977, the UK has considerably extended the scope of the measure and it is no longer limited to trading in the commodities originally covered by the derogation. This infringes EU law because this type of ‘standstill’ derogation cannot be extended. The story ends by stating that this is also generating major distortions of competition to the detriment of other financial markets within the EU.

The HM Treasury Statement confirms that the UK’s current tax treatment of commodity derivatives remains unchanged until such time as it is changed. The UK Government will no doubt be considering the Commission’s views. If the Commission is unsatisfied with the UK’s response it will then send a reasoned opinion. If the Commission remains unsatisfied with the UK’s subsequent response then it can make an application to the CJEU. The whole process can be quite lengthy and has been known to take a number of years before the CJEU gives judgment.

For further information please contact:

Bob Jones

Jill Bromwich

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