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Introduction

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The Trading of commodities is a major element of the worlds financial system in that many institutions and investors use such trading as a means of speculating to generate wealth or hedge against adverse price movements in other investments they hold.  Commodities can be traded by Banks, Commodity Houses, Brokerages etc. 

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Commodities are often traded locally in individual countries or on exchanges in terminal markets located in major Financial Centres in the US, Asia and Europe.

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In the UK, there are a number Terminal Markets which are governed by the Terminal Markets Order (1973):

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• London Bullion Market Association  

• London Metals Exchange 

• London Platinum and Palladium Market 

• International Petroleum Exchange London 

• The London Cocoa Terminal Market

• The London Coffee Terminal Market

• The London Meat Futures Market

• 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

• The London Grain Futures Market

• The Liverpool Barley Futures Market

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Terminal Markets Order

 

The Terminal Markets Order (TMO) was originally published in 1973 and its aim was to remove the administrative burden of VAT and enhance competitiveness in the UK markets by allowing certain Commodity Derivative transactions between Terminal Market members and non members to be Zero Rated.  

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Note: The Terminal Market Order applies specifically to commodity derivatives (Futures, Options, Spots, Forwards) where the underlying asset is a physical commodity such as Grain, Oil, Investment Gold, Pork bellies, Platinum etc. 

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The Terminal Markets Order (TMO) does not cover Financial Derivatives based on currencies, interest Rates, Shares, Bonds, indices etc. These are covered under the Banking Section. (Click on Banking Button on home page for infomation)

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Products That Benefit From Zero Rating

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Futures Contracts 

Commodity Futures are standardised derivatives contracts offered by and traded on commodity exchanges by Investment banks, Commodity Houses, Brokerages (as Exchange Members) and allow investors to:

• Speculate on the price movement of an underlying commodity such as (Wheat, Coffee, Oil, Natural Gas, Silver)

• Hedge against the movement of the price of a commodity. ( Mainly large companies and investors that use the future contact as a hedge against to protect their own financial instruments )​

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Buying or selling a Futures Contract means that the buyer and seller are obligated to buy and sell an agreed quantity of a commodity at an agreed price and take delivery of and transfer the underlying commodity respectively on the expiry date of the contract.  Delivery normally occurs when instruction is given to remove the goods from the warehouse. 

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Commodity Futures contacts can either be cash settled (most) where there is no delivery of the underlying commodity and contracts are closed out prior to expiry via the settlement of cash or non cash settled meaning that the commodity is actually delivered at expiry.  So if potatoes were the underlying commodities, they would be transferred to the buyer. 

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Commodity Futures benefit from Zero Rating where: 

  

• They are traded on one of the Terminal Markets listed above

• Futures transactions are between members of the terminal markets (even where delivery occurs)

• Futures Transactions are between a member and a non member of the Terminal Market and there is no delivery of the commodity. 

• An agent or broker (who is a market member) between a member and member or non member  

 

Note:  Where delivery occurs between a member and non member of a Terminal Market, the VAT liability will be based on the underlying product.  So for example if the product was Investment Gold, the transaction would be Exempt rather than Zero Rated when the Gold has been delivered. 

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Note: Futures Contracts can also be agreed and bought off exchange (over the counter) OTC.  These contracts will not attract Zero Rating (unless the commodity is delivered and specifically zero rated).  Where Futures are bought OTC, the VAT liability follows the liability of the commodity being traded.

 

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Forward Contracts

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Commodity Forward Contracts are similar to futures contracts in that they oblige a buyer or seller to buy or sell a given amount of a commodity at a set price on a specified date.  The difference between Forwards and Futures is that the contracts are non standardised and traded OTC and do not attract Zero Rating unless the commodity being traded is zero rated. 

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Similar to Futures traded OTC, the VAT liability will follow the liability of the underlying commodity being traded. 

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Option Contracts

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Option contracts provide the right to either buy or sell an underlying commodity at an agreed price (strike price) on a given date. There is no obligation to buy or sell the underlying commodity and the holder can simply let the option:

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• Expire

• Close out the option (buy or sell before expiry)

• Exercise the option and sell or purchase the underlying commodity

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Regardless of whether an option holder chooses any of the above options, they will have to pay a premium for the right to buy the option.

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The grant of an option contract is a Zero Rated supply if they are traded on any of the above earlier mentioned Terminal Markets irrespective of whether the transaction is between two market members or a market member and a non market member.

 

The option contract will also remain Zero Rated if it is exercised.  However if the option is exercised there will be an additional supply of the underlying commodity.

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Actuals Contracts

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Actuals are contracts where the parties agree to the delivery of a commodity for a specific amount and price on a specific date. This can be in the future (futures) or on the spot (Spots)

 

These contracts are Zero Rated where they are traded by two market members on a Terminal Market as listed above. 

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Investment Gold

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Investment Gold is either:

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• Gold of a purity not less than 995 thousandths that is in the form of a bar, or a wafer, of a weight accepted by the bullion markets

• A gold coin minted after 1800 that is:  (a) of a purity of not less than 900 thousandths (b) or has been, legal tender in its country of origin (c) of a description of coin that is normally sold at a price that does not exceed 180 per cent of the open market value of the gold contained in the coin

• An investment gold coin as specified in Investment gold coins (VAT Notice 701/21A).

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Supplies of Investment Gold between two taxable persons who are members of  the London Bullion Market Association (LBMA) are Zero Rated.

 

This includes:

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• Futures Contracts

• Option Contracts

 

Investment Gold that is not traded between members of the LBMA is covered under the VAT Exemption and the supply of Investment Gold here is exempt including for Financial Derivatives (Futures, Forwards, Swaps) excluding options.

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Note: Suppliers of Investment Gold can also apply to Opt to Tax and thus charge 20% Standard Rated VAT on their supply which allows them to recover VAT on their purchases. 

 

See HMRC  VAT Notice 701/21: gold  

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Voluntary Carbon Credits

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From 1 September 2024 VAT needs to be accounted for on certain trades of voluntary carbon credits at the standard rate.

 

The following activities are still outside the scope of VAT:

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• the first issue of a voluntary carbon credit by a public authority

• the holding of voluntary carbon credits as an investment, where there is no economic activity

• donations made to voluntary carbon credit projects

• sales of voluntary carbon credits from self-assessed projects with no independent or third-party verification

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Voluntary carbon credits in the scope of the Terminal Markets Order

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The Terminal Markets Order provides a VAT zero rate for wholesale commodity transactions made by members on specified terminal markets.

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From 1 September 2024, HMRC will allow the VAT relief granted under the Terminal Markets Order to apply to contracts in taxable voluntary carbon credits traded on terminal markets, within the terms of the relief.

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Electricity and Gas Trading

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Banks involved in Investment or Wholesale banking often trade in Natural Gas and Electricity via trading contracts for the purchase and supply (delivery) of wholesale gas and electricity. Such supplies are normally subject to the Domestic Reverse Charge Procedure. 

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What this means is that the supply of Gas and Electricity will effectively be Zero Rated for the bank supplying as the liability for accounting for the Output VAT will be passed on to the customer. Only the net sales amounts will appear on their VAT return in Box 6. 

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The opposite will be the case where the bank purchases Gas or Electricity and has to self account for VAT under the reverse charge mechanism thus effectively paying 20% VAT to HMRC and at the same time recovering 20% VAT from HMRC meaning a nil payment in Box 5 to HMRC. 

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Note: This should not be confused with the supply of gas to businesses plus 20% VAT and the supply of domestic Gas and Electricity which is charged at the reduced rate 5% by energy companies.

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Emission Allowances

 

UKETS (Replaces EU scheme)

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Emissions trading schemes usually work on the ‘cap and trade’ principle, where a cap is set on the total amount of certain greenhouse gases that can be emitted by sectors covered by the scheme. This limits the total amount of carbon that can be emitted and, as it decreases over time, will make a significant contribution to how we meet our Net Zero 2050 target and other legally binding carbon reduction commitments.

Within this cap, participants receive free allowances and/or buy emission allowances at auction or on the secondary market which they can trade with other participants as needed.

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From the 1 May 2021 domestic Reverse charge VAT applies to the trading of UKETS - Emission Trading Certificates similar to Electricity and Gas Trading above. 

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Oil Trading

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The supply of oil for non domestic purposes is Standard Rated including Crude oil, Kerosene, Road Fuel, White Diesel among others.

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Oil traded as commodity futures are covered above under futures.

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Fiscal Warehousing

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​A fiscal warehouse is a regime where certain commodities in free circulation within Great Britain or between Northern Ireland and the EU can be traded VAT-free, subject to the certain conditions.

 

Goods are in free circulation if they’re produced in the EU or, in the case of imported goods, all duties, taxes and levies due at importation have been paid.

   

How Fiscal warehousing works

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Fiscal warehousing is a regime under which certain specified commodities may be placed in a notified warehouse and traded by businesses.

VAT on the supplies of commodities both entering a fiscal warehouse and made whilst within the warehouse is relieved and accounted for when the commodities are removed from the regime.  Goods must be in

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free circulation for this to happen. 

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Eligible Commodities

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There are many types of commodities that can be placed in a fiscal warehouse and are eligible to be traded and transferred between fiscal warehouses in Great Britain or between Northern Ireland and the EU.      

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Some of these are listed below (list is not exhaustive):

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• Copper

• Zinc

• Nickel

• Aluminum

• Lead

• Oil

• Cerials

• Platinum

• Palladium

• Coffee (unroasted)

• Potatoes

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Eligibility Criteria

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The eligibility criteria is:

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• Commodity in question should be commonly traded in large quantities on a recognised international market 

• All commodities entered into the fiscal warehouse must be in free circulation

 

Trading within and Removal of Goods from the Warehouse   

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Supplies of goods which are in a fiscal warehouse are outside the scope of UK VAT. There is no requirement to account for VAT to HMRC on such transactions, nor is there any direct customs control over movements or transfers of goods whilst within the fiscal warehouse regime.

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When goods are removed from the regime the amount of VAT payable will correspond to either the amount which would have been due on the:

• Transaction that caused the goods to be entered into the warehouse

• Value of the last supply if they have been sold within the warehouse

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VAT becomes due when commodities finally leave the fiscal warehousing regime. The amount of VAT due corresponds to the amount of tax which would otherwise have been due on the final supply of goods in the warehouse, plus the amount of tax which would have been applied to any of the relieved supplies of services relating to those goods affected after that final supply.

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The person liable to pay the VAT on removal is the person who causes the goods to cease to be covered by the regime, if you are:

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• VAT registered, you should account for the VAT on your VAT Return covering the period of the removal

• Not registered, you must complete form VAT150 Advice of removals from fiscal warehouse by persons unregistered for VAT and present it to the local EPU even when no VAT is due on removal

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Payment of any VAT due on removal must be made in cash or by cheque. For all removals, proof of ownership and either a stamped copy of form VAT150 or a VAT registration number is required by the warehouse keeper before the goods can be released​

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Where goods are acquired into Northern Ireland from an EU member state and subsequently removed from warehouse without being sold within the warehouse, acquisition VAT must be accounted for in the normal way as explained in VAT Notice 725: VAT on movements of goods between Northern Ireland and the EU.

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When is VAT not due on Removal of Goods 

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If you remove your goods from a fiscal warehouse in any of the following situations, VAT is not due on the removal of the goods.

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• Removal of zero-rated goods that have not been subject to relieved supplies of services whilst warehoused

• Removal of your own goods (that either you produced or purchased VAT paid) which you entered to the fiscal warehouse and that have not been sold, nor have they been subject to relieved supplies of services whilst warehoused

• Exports where goods are exported from Great Britain outside the UK or from Northern Ireland to Great Britain and outside the EU, standard export procedures apply. Such removals must be supported by normal evidence of export. Any associated relieved supplies of services do not become taxable where goods have been exported.

• Dispatches to EU member states from Northern Ireland where goods are removed in the course of an intra-EU supply, normal Intrastat and intra-EU supply or acquisition rules apply for VAT-registered traders. Relieved services are not taxed on removal to an EU member state but should be reflected in the value of the supply.

• Temporary removals - authorisations (either general or specific) must be obtained through the approving office. Goods must be returned to the original site or another covered by the authorisation. In order to obtain authorisation, the remover must state the length of time the goods will need to be removed for and for what purpose the removal is required. Such removals must be notified to the warehouse keeper who’s responsible for ensuring that any temporary removals meet the prescribed conditions.

• VAT-free sampling small quantities of commodities of a negligible commercial value can be removed for this purpose under a simplified removal scheme. The amount and approximate value of the commodity to be removed must be detailed in the authorisation given by the VAT helpline. Such removals must be notified to the warehouse keeper, who’s responsible for ensuring that they meet the prescribed conditions.

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VAT Treatment for Services in a Fiscal Warehouse

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Services which may be zero-rated are supplies of allowable physical services within the fiscal warehouse which would otherwise be taxable at the standard rate, for example storage charges.

Services which may not be zero-rated are brokerage, agents fees and transport between warehouses.

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On removal of the goods from the warehouse, any VAT relieved on each supply of services relating to those commodities made after the last sale in warehouse of such commodities must be accounted for, together with the VAT due on the relieved supply of the commodities.

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For example the commodity may be divided up into smaller packages by a simple operation that does not change its nature. The value of the service that is performed whilst the commodity is still relieved from VAT in the warehouse, must be added to the value of the supply when it is finally sold and removed from the warehouse.

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For example:

Value of re-packaging service £50
Value of final supply of commodity on removal from warehouse £100
Value of total final supply £150
VAT due on total final supply £150 × 20% = £30

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Where, as a result of an operation carried out on eligible commodities, the resulting commodities are no longer eligible for fiscal warehousing, they’re treated as having been removed and VAT will become due.

 

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VAT Registration

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If your only business activity is the supply of goods within a fiscal warehousing regime you have no liability to register for VAT, but you may do so voluntarily if you wish under VAT Act 1994 Schedule 1(10). Your liability to register for other business activities is not affected by either the value of supplies made in a fiscal warehouse or the value of deemed supplies of relieved services accounted for by the remover of the goods.

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