In response to the City of London creating VAT loophole, the European Commission has opted to take the case to the European Court of Justice which could escalate into a battle that, according to the UK, could harm the City of London’s competitiveness once the UK is out of the EU.

The European Commission is bringing the case in the European Court of Justice only two months ahead of the Brexit date, while the UK has been applying a zero-rate of VAT to transactions carried out on certain commodity markets in Britain.

Under the rules, the United Kingdom has the right to apply a zero VAT rate to commodities contracts traded on terminal markets, including the London Metal Exchange, but has expanded this right to create an exemption over time that manifests itself as a tax loophole that unfairly boosts the City of London at the expense of other EU financial centres.

According to the Commission, this derogation was notified to the EU executive in 1977, and the UK has extended the scope of the measure considerably, meaning that it is no longer limited to trading in the commodities originally covered.
However, under EU rules, this type of “standstill” derogation cannot be extended in scope. It also generates major distortions of competition to the detriment of other financial markets within the EU.

Thursday’s referral follows the failure of the British government to bring its legislation into line with EU VAT law following the Commission’s reasoned opinion in July 2018.