European Commission Formally Questions United Kingdom’s Tax Treatment of LME Trades

The United Kingdom Treasury advised yesterday that the European Commission is investigating whether the British government is assessing a sufficient level of taxes on commodity derivative trades, including trades on the London Metal Exchange involving aluminium.

Earlier this week the Commission sent a “letter of formal notice” to the United Kingdom government, which is the first step in the infraction process. The process may ultimately lead to a lawsuit filed by the Commission to determine whether the United Kingdom government has violated EU laws.

The Commission’s letter outlines its interpretation of the laws surrounding the United Kingdom’s value-added tax (VAT) treatment of the trades, and it sets out a two-month time period for the United Kingdom government to respond.

Though the EC believes that such trades may be subject to VAT tax treatment, the United Kingdom government has exempted such trades by statute for over forty years under the 1973 Terminal Markets Order. Per the order, trades on the LME that are executed either by members of the ring or that do not result in actual delivery of a commodity are “zero-rated” for purposes of the VAT tax.

Upon receipt of the letter, the British government said it will respond after looking into the matter.

“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 emphasized in a statement.

Should the tax treatment for commodity derivatives change, the impact upon the aluminium trade at the London Metal Exchange will be significant.

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

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