The UK government is bracing for a legal battle with Brussels over attempts by the EU to force it to increase taxes on trade in commodity derivatives, with the UK pledging to fight a move that could undermine the competitiveness of the City of London after Brexit.
Officials told the Financial Times that the Treasury will defend value-added tax exemptions that have been challenged by the European Commission on the grounds that they go beyond exceptions allowed by EU law.
The dispute centers on an EU law dating from the 1970s which gives the UK the right to apply a zero VAT rate to commodity contracts traded on “terminal markets” such as the London Metal Exchange.
The position of the European Commission is that the exemption has, over the decades, been extended much wider than originally intended as the markets evolve, with traders able to evade VAT on goods. commodity options, futures and spot transactions.
But Britain has defended its approach as conforming to EU ‘standstill’ rules which allow zero rates, as it was already in place in the UK before January 1977. Brussels disagrees with the UK. United on the issue since March, when the Commission first voiced its concerns.
In July, he gave the UK two months to either align its national tax rules or face a lawsuit at the European Court of Justice in Luxembourg.
Ministers are due to respond to the Commission by September 19 and seek the agreement of the government’s internal Brexit war cabinet to defend the status quo before the EU’s highest court.
UK officials said the Treasury felt it could “legally justify the VAT treatment applied to all commodities in these markets” and believed that preserving this “popular simplification” for all markets was “vital to ensuring let them stay in the UK â.
The disagreement underscored Brussels’ determination to fully apply EU law to the UK even as the country prepares to leave the bloc in March 2019.
This decision also reflects the EU’s sensitivities towards the city, which has intrinsic advantages over other European financial centers.
Although there are only a few months until Brexit day, a draft withdrawal agreement currently being negotiated between the UK and the EU would enshrine the Commission’s right to pursue such ‘infringement proceedings’. During Britain’s post-Brexit transition period, which runs until the end of 2020.
It is not clear at this stage what would happen once the transition period is over, as the UK and EU are only in the early stages of defining their future long-term relationship.
A Commission spokesperson told FT that “the UK has significantly extended the scope of the measure” since its notification in 1977, “meaning that it is no longer limited to trade in products initially covered “.
“Under EU rules, this type of derogation from the status quo cannot be extended,” the spokesperson said. “It also generates significant distortions of competition to the detriment of other financial markets within the EU.”
A UK official said the planned court challenge showed Philip Hammond, the Chancellor, was “the one really fighting for the city after Brexit”.