Legislative reform of the Terminal Markets Order: Consultation

The HM Treasury and the HM Revenue & Customs have launched a joint consultation on proposed modifications to the Value Added Tax (Terminal Markets Order) (TMO). The changes are primarily aimed at modernizing the order and providing more regulatory flexibility.
#### Background
The Value Added Tax (Terminal Markets Order) was implemented in 1973 to clarify the treatment of wholesale commodity transactions made by members of an exchange or by specified industry associations. Specifically, such commodity transactions are excluded from Value Added Tax (VAT), if certain conditions are met (besides being a member of the exchange or of an excluded industry association). Typically, these commodity include precious metals, agricultural goods, and energy products.
#### Proposed changes
The proposed changes do not involve significant modifications to the scope of the TMO. They rather seek to update the legislation to better reflect current market practices and to ensure the order can be easily adjusted in the future. The key proposed changes are briefly summarized below:
(1) Defining Recognized Exchanges and Market Associations: Currently, the TMO lists exchanges and market associations to which it applies (Article 2 of the order). To enhance flexibility, the government proposes defining these entities based on specific criteria which would eliminate the need to draw up further legislation, if any changes occur. These criteria could include the following, among others:
– The application of VAT hinders market efficiency simply due to sheer amount of transactions and corresponding administrative burdens;
– The transactions are made by firms or individuals which are – by agreement – member of named commodity exchanges or associations;
– The transactions involve futures, forwards, options, or certain transactions between members of the commodity exchange or market association;
– The contracts subject to trading provide for the option of physical delivery.
Alternatively, the two regulators are considering to issue a VAT Notice which would have the force of law and which would include the list currently included in Article 2. However, this alternative would imply that the list is kept up-to-date at all times, which is hard go accomplish given the fact that commodity exchanges frequently rename, re-structure or merge.
(2) Defining Members of the Market: According to the regulators, the current definition of „members“ needs updating due to changes in trading methodologies and the potential that „members“ may be confused with ALL members of a trade association or an exchange. As the exemption from VAT tax only applies to „members“ that actually are permitted to trade on the exchange in accordance with the rules of an exchange, the regulators suggest defining members as „individuals or entities ordinarily engaged with dealings on the market“.
Alternatively, the regulators are considering to issue a VAT Notice which would have the force of law and which would include a list of „member classes“ with those members that the government recognizes as dealing on the market.
(3) Defining Qualifying Transactions: The government aims to define transactions eligible for the TMO’s zero VAT rate to clearly distinguish those derivative transactions subject to VAT from those that aren’t so as to prevent any misunderstanding in this context. This definition could encompass some of the above noted criteria like the transactions
– involve futures, forwards, options, or spot contracts with physical delivery provisions; or
– are conducted on a recognized exchange.
(4) Specifying Commodities Traded: While maintaining the scope of commodities covered by the TMO, the regulators propose specifying them within the legislative framework. These would include – as quoted:
– Precious metals, including gold, silver, platinum and palladium;
– Agricultural goods, including cocoa, coffee, and sugar;
– Energy products, including crude oil, electricity, and natural gas;
– Mandatory compliance carbon emission allowances (i.e. UK ETSs).