Guidance

Commodities and terminal markets (VAT Notice 701/9)

VAT treatment of transactions in commodities, commodity derivatives and on terminal markets.

From:
HM Revenue & Customs
Published
18 October 2011

Detail

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. Overview

1.1 What this notice is about

This notice tells you about the VAT treatment of transactions:

  • in commodities and commodity derivatives
  • 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.

1.2 Who should read this notice

You should read this notice if you’re:

  • 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’re a commodity trader or market-marker, merchant or agent, intermediary involved in commodity derivatives)

1.3 Financial services

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

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

1.4 The law covering this notice

This notice reflects the law at:

  • VAT Act 1994 section 50
  • 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

Check that your transaction is zero-rated if your transaction is traded on a terminal market listed in section 4 and you’re either:

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

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 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 ‘OTC’. These are non-standard contracts traded off-exchange. Both are taxable and if you’re 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:

  • 2 market members, see section 4 for a list of market members
  • 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. 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 2 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. That new supply will be zero-rated if it meets the conditions for:

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 in VAT Notice 701/21: gold for the definition of investment gold.

If you’re 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 VAT Notice 701/21: gold for more information.

3.2.5 Agents and other intermediaries

Your supply to the principal member of arranging that transaction is zero-rated if you:

  • are acting as an agent in dealings between members
  • are a member of a relevant market (for relevant market members see section 4)
  • arrange a transaction under the special rules for terminal markets described in this notice that is liable to the zero rate as either:

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 (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’s a special scheme for investment gold which is explained in VAT Notice 701/21: gold.

But, if you and your customer are members of the London Bullion Market Association and you’re supplying investment gold, your supply is zero-rated. (See the conditions set out in VAT 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 Investment gold coins and VAT (Notice 701/21A).

3.4 International services

Normal VAT rules apply and you should read VAT Notice 741A: place of supply of services if you arrange for transactions (either as agent or principal) in any:

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

Notice 741A 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 VAT guide (Notice 700).

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’re 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.

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.

Name of market:

  • 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.

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Updates to this page

Published 18 October 2011

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