Commodities and terminal markets

HMRC Reference:Notice 701/9 (October 2011) View Change History
 

Contents

Foreword

1. Introduction

1.1 What is this notice about?

1.2 Who should read this notice?

1.3 Financial services

1.4 What law does this notice cover?

2. Commodities

2.1 Commodity futures, options and other derivatives

2.2 Other types of trading and payments

3. Terminal markets

3.1 Terminal markets

3.2 Scope of zero rating

3.3 Supplies on terminal markets not covered by the zero rate

3.4 International Services

3.5 Record keeping

4. Markets and market members

Your rights and obligations

Do you have any comments or suggestions?

Putting things right

How we use your information

 

Foreword

This notice cancels and replaces Notice 701/9 (March 2002). Details of any changes to the previous versions can be found in paragraph 1.1 of this notice.

1. Introduction

1.1 What is this notice about?

This notice tells you about the VAT treatment of transactions:

  • in commodities and commodity derivatives and
  • on terminal markets.

Section 2 explains the VAT treatment of contracts based on underlying commodities.

Section 3 explains what supplies of goods and services, made in the course of dealings on certain commodity (or ‘terminal’) markets, are zero-rated.

Section 4 lists these markets and market members.

This notice and others mentioned are available both on paper and on our internet site at www.hmrc.gov.uk.

1.2 Who should read this notice?

You should read this notice if you are:

  • a bank or other financial institution
  • a commodity trade house
  • a brokerage house
  • an exchange
  • another specialist firm
  • VAT registered and dealing on commodity markets or in options or other derivatives (for example, if you are a commodity trader or market-marker; merchant or agent; intermediary involved in commodity derivatives).

1.3 Financial services

If you are involved in any of the supplies listed below, you should read Notice 701/49 Finance before deciding on the VAT treatment of your supply:

  • money and dealing with money
  • securities for money
  • debt assignment and factoring
  • credit and credit/debit cards
  • financial derivatives
  • brokers and intermediaries involved in any of the above supplies.

1.4 What law does this notice cover?

This notice reflects the law at:

  • VAT Act 1994 section 50; and
  • Value Added Tax (Terminal Markets) Order 1973 (as amended).

2. Commodities

2.1 Commodity futures, options and other derivatives

A commodity is a raw material such as grain, coffee, metal or oil and is traded on a commodity market. This can be based in the country of the commodity’s origin or on a ‘terminal market’ (a commodity market in a trading centre, such as London). As commodity prices fluctuate widely commodity exchanges assist in enabling producers and users of the commodity to hedge the price risk with outside speculators and investors.

2.1.1 Liability of commodities traded on terminal markets

If your transaction is traded on a terminal market listed in section 4; and you:

  • are a member of that market or trading with a member of that market or
  • act as an agent or broker between a member of the market and another person

you should read section 3 on ‘Terminal Markets’ to see if your transaction is zero-rated.

2.1.2 Liability of commodities traded off-exchange

If you do not trade on one of the listed terminal markets (at section 4) your supply is treated as follows:

  • Commodity futures and actuals
    A commodity future traded outside of one of the terminal markets listed at section 4 follows the liability of the underlying commodity.
  • Commodity options
    An option is a right to buy or sell a commodity etc on a certain date in the future at an agreed price, but without the obligation to do so. The buyer and seller of the option agree on the premium to be paid. This premium is separate from the price of goods and is payable whether or not the buyer exercises the option. The payment for the right to buy a commodity, rather than a contract to buy a commodity is a standard rated supply of services.
    If the option is exercised there will be a separate supply of the commodity itself.

2.2 Other types of trading and payments

2.2.1 Trade by locals

Locals are traders registered to members of exchanges who act in an independent capacity to some degree, but in the embodiment of the member to whom the local is registered. Locals can be employees, self-employed or engaged in a joint venture or partnership with a member. The VAT treatment depends on the status of the local.

  • Trade by locals
    Employee locals may manage or trade on an account for their member and will be on the member’s payroll. The payments from the member to the local are outside the scope of VAT.
  • Self-employed locals
    Self-employed locals may trade on their own account. When the local makes a trade it is the member who is the principal to the contract. However, when the trade is completed there is another contract between the member and the local, now in the same position for VAT purposes as a third party client, in which both parties are also principals (that is to say, there is a back-to-back arrangement). The supply made by the member to the client is a taxable supply of a commodities contract.
    A self-employed local may also act as the embodiment of the member with which the local is registered. For VAT purposes the local is acting as an agent - you should read section 3 for further information about the liability of the agent’s supplies.
  • Joint ventures and partnerships
    Where the local and the member are engaged in a joint venture or partnership, every trade executed by the local is a trade of the member to whom the local is registered and the rules regarding transactions by members discussed above will apply to this initial transaction.
    The VAT liability of the remuneration received by the local under the joint venture or partnership arrangements will depend on the nature of the agreement between the parties.

2.2.2 Trading off-exchange

Over-the-counter (OTC)

Commodity futures and options can also be traded ‘over-the-counter’ (OTC). These are non-standard contracts traded off-exchange. Both are taxable and if you are an intermediary you should see section 3.

2.2.3 Trading on non-UK exchanges

The value and liability of the supplies made for VAT purposes depends on whether you are a principal or an agent in respect of transactions in commodity contracts traded on non-UK exchanges. The rules of the overseas exchange and the local legislation could also have a significant effect on how your transaction should be viewed for UK VAT purposes. Each transaction must be examined and the VAT liability determined on its own merits.

3. Terminal markets

3.1 Terminal markets

You can zero rate some supplies traded on the terminal markets listed in section 4.

If your supply does not involve one of the listed markets in any way (that is to say, the supply is neither to, from, nor between a market member), you should read paragraph 3.3.1.

If your supply does involve one of the listed markets, read on to decide if the supply can be zero-rated.

3.2 Scope of zero rating

The following transactions are liable to the zero rate:

3.2.1 Futures transactions

Futures transactions in commodities ordinarily dealt with on a market listed in section 4 between:

  • two market members (see section 4 for a list of market members) or
  • a market member and a non-member, provided the transactions do not lead to a physical delivery of the goods. (For this purpose, ‘delivery’ takes place when instructions are given for the goods to be physically removed from the warehouse, vault etc. If a futures contract leads to delivery, VAT must be accounted for on the basis of the original contract price.)

3.2.2 Actuals transactions

Actuals transactions between two market members which result in the goods being delivered are liable to the zero rate, provided that if the market is the:

  • London Metal Exchange (LME), the transaction is between members entitled to deal in the ‘ring’
  • London Cocoa Terminal Market, the London Coffee Terminal Market, the London Meat Futures Market, the International Petroleum Exchange of London (IPE), the London Potatoes Futures Market, the London Soya Bean Meal Futures Market, the London Sugar Terminal Market, the London Vegetable Oil Terminal Market or the London Wool Terminal Market, the transaction is a sale registered with the International Commodities Clearing House Limited or its successor
  • London Rubber Market, the London Bullion Market or the London Platinum and Palladium Market, the transaction is between members of the respective market
  • London Grain Futures Market, the transaction is a sale registered in the Clearing House of the Grain and Feed Trade Association Limited
  • Liverpool Barley Futures Market, it is a sale registered at the Clearing House of the Liverpool Corn Trade Association.

3.2.3 Options

If you grant an option exercisable on a future date your supply is zero-rated provided the commodity is ordinarily dealt with on a terminal market listed in section 4. This is regardless of whether it is between two market-members or a market-member and a non-member.

The option remains zero-rated even if the option is exercised. If the option is exercised, there will also be a further supply. If that new supply meets the conditions for:

  • a futures transaction (at paragraph 3.2.1) or
  • an actuals transaction (at paragraph 3.2.2)

it will also be zero-rated.

3.2.4 Gold

Supplies of ‘investment gold’, including futures and options, between taxable persons who are members of the London Bullion Market Association are liable to the zero rate. See the conditions set-out Notice 701/21 Gold for the definition of investment gold.

If you are an intermediary acting between members of the London Bullion Market Association trading investment gold, your supply may be zero-rated. See paragraph 3.2.5 for the criteria for zero rating intermediaries’ supplies.

If the zero-rating criteria are not met in full your supply could be exempt or standard-rated and you should refer to Notice 701/21 Gold for more information.

3.2.5 Agents and other intermediaries

If you:

  • are acting as an agent in dealings between members and
  • are a member of a relevant market (for relevant market members see section 4) and
  • arrange a transaction under the special rules for terminal markets described in this notice that is liable to the zero rate as -
  • a futures transaction (see 3.2.1) or
    - an actuals transaction (see 3.2.2) or
    - the supply of an option (see 3.2.3) or
    - an investment gold transaction between members of the London Bullion Market Association (see 3.2.4);

then your supply to the principal member of arranging that transaction is zero-rated.

Your supply will be standard-rated if the underlying supply that you arrange is not zero-rated under the provisions described in this section - for example, because of an instruction for ‘delivery’ between a member and a non-member for a futures transaction.

3.3 Supplies on terminal markets not covered by the zero rate

3.3.1 Transactions between non-members

Any supply of goods between parties who are not listed in section 4 under a futures contract even if it does not lead to physical delivery of the goods, is not zero-rated under the arrangements described in this notice. It will be subject to the normal VAT rules (that is to say, it will follow the VAT liability of the main supply). For example, if you supply a futures contract for the supply of potatoes the contract will be zero-rated as potatoes are zero-rated.

3.3.2 Delivery between non-market and market members

Any supply of goods between a market member listed in section 4 and a non-member under a futures contract which leads to a physical delivery of the goods is not covered by the zero rate for terminal markets (see above: unless the supply of goods is in itself a supply that is liable to the zero rate).

3.3.3 Supplies by brokers or agents who are not members of a market listed in section 4

If you are not a member of a terminal market listed in section 4 then your supply is not zero-rated for terminal markets and the normal VAT rules apply.

3.3.4 Return or shared commission

If you introduce business to a broker and receive a fee or share of the broker’s commission (or brokerage), that fee is consideration for a supply of services that is liable to the standard rate of VAT unless you meet the conditions set-out in paragraph 3.2.5.

3.3.5 Gold scheme and investment gold

There is a special scheme for investment gold which is explained in Notice 701/21 Gold.

However, if you and your customer are members of the London Bullion Market Association and you are supplying investment gold, your supply is zero-rated. (See the conditions set out in Notice 701/21 Gold notice for a definition of investment gold.)

3.3.6 Gold coins

Dealings in gold coins between members listed in section 4 and non-members are not accepted as dealings in goods ordinarily dealt with on the gold terminal markets. For more information see Notice 701/21 Gold and Notice 701/21A Investment gold coins.

3.4 International Services

If you arrange for transactions (either as agent or principal) in:

  • futures or options for persons who belong outside the United Kingdom or
  • the sale or purchase of goods located outside the United Kingdom or
  • options which are being sold by persons who belong outside the United Kingdom

normal VAT rules apply and you should read Notice 741 Place of supply of services. This explains the liability of these supplies and how you should account for VAT on them.

3.5 Record keeping

You are not required to keep VAT records for any of the zero-rated supplies for the relevant terminal markets described in this section of the notice or to include them in your VAT returns. This applies whether or not you are a market-member listed in section 4. But if you do decide to include such transactions in your VAT return you must record all of them in the same way as any other supplies of goods or services - they must be properly invoiced and accounted for in the normal way - see Notice 700 The VAT Guide.

Although futures transactions may be settled on a net basis, for VAT purposes each of your futures transactions is a supply in its own right whose tax value is the price agreed under the contract. If you are an agent and your supply is not liable to the zero rate, you should account for VAT on the total amount of commission or brokerage that you charge without deduction of any part of it paid to third parties.

4. Markets and market members

The following persons are those regarded as ordinarily engaged in dealing on the market (market members) and are therefore eligible to zero rate certain transactions, as principal or agent, in commodities ordinarily dealt with on the market.

Name of Market


Classes of persons regarded as market members


The London Metal Exchange


Members entitled to deal in the ‘ring’ of the London Metal Exchange.


The London Rubber Market


For actuals transactions - class P (producer members), class A (selling agent and importer members), class B (broker members) and class C (dealer members) of the Rubber Trade Association of London.


For futures transactions on the London Rubber Terminal Market - floor and associate members of the London Rubber Terminal Market Association.


The London Cocoa Terminal Market; The London Coffee Terminal Market; The London Meat Futures Market; The International Petroleum Exchange of London; The London Potato Futures Market; The London Soya Bean Meal Futures Market; The London Sugar Terminal Market; The London Vegetable Oil Terminal Market; The London Wool Terminal Market


Full and associate members of these markets provided the sale is registered with the International Commodities Clearing House Limited or its successor.


The London Grain Futures Market


Provided the sale is registered in the Clearing House of the Grain and Feed Trade Association Limited.


The Liverpool Barley Futures Market


Provided the sale is registered at the Clearing House of the Liverpool Corn Trade Association.


The London Platinum and Palladium Market


Provided the transaction is only between any full or associate members of the respective market.


The London Bullion Market


A person is regarded as being a member of the London Bullion Market only if that person is a member of the London Bullion Market Association (LBMA).


Your rights and obligations

Your Charter explains what you can expect from us and what we can expect from you. For more information go to Your Charter.

Do you have any comments or suggestions?

If you have any comments or suggestions to make about this notice, please write to:

Finance & Gold Team
Customs and Tax Practice
4th Floor, West
New Kings Beam House
22 Upper Ground
London SE1 9PJ

Please note this address is not for general enquiries.

For your general enquiries please phone our Helpline 0845 010 9000.

Putting things right

If you are not satisfied with our service, please let the person dealing with your affairs know what is wrong. We will work as quickly as possible to put things right and settle your complaint. If you are still unhappy, ask for your complaint to be referred to the Complaints Manager.

For more information about our complaints procedures go to www.hmrc.gov.uk and under quick links select Complaints.

How we use your information

HM Revenue & Customs is a Data Controller under the Data Protection Act 1998. We hold information for the purposes specified in our notification to the Information Commissioner, including the assessment and collection of tax and duties, the payment of benefits and the prevention and detection of crime, and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:

  • check the accuracy of information
  • prevent or detect crime
  • protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you, as well as by others, such as other government departments or agencies and overseas tax and customs authorities. We will not give information to anyone outside HM Revenue & Customs unless the law permits us to do so. For more information go to www.hmrc.gov.uk and look for Data Protection Act within the Search facility.

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