In a landmark judgment, the European Court of Justice has ruled that foreign exchange transactions are within the scope of VAT. Where no commission is charged for such services, the value of the consideration is the spread - the difference between the buying and selling prices of transactions over a given period of time.
The First National Bank of Chicago's London branch carries out foreign exchange dealing. It is a market maker and does not charge commission. Rather it buys and sells foreign currency at different prices, and hopes to make a profit from the spread. An issue arose between the Bank and Customs & Excise as to whether the transactions were within the scope of VAT, that is whether or not they were supplies of goods or services effected for consideration within Article 2 of the Directive.
The strange feature about this case is the position taken by each of the parties. Financial services are generally within the scope of VAT but specifically exempted from it. Customs would usually argue that supplies are within the scope of VAT, but in this case argued that they were not. The clue lies in input tax recoverability. The particular Forex deals in issue were conducted with parties outside Europe, and by operation of special rules while no VAT is due to Customs from currency sales, the Bank is entitled to recover input tax on overheads which are attributable to those sales.
Customs argued that the lack of any commission or fee charged by the Bank meant that there was no consideration moving to the Bank in return for its services of exchanging foreign currency. Consequently there could be no supply of goods or services for VAT purposes because an essential component, that there must be consideration, was missing. This is a nonsense in commercial terms. It is clear that the Bank sets its rates in such a way that it does effectively receive payment for its services. Where it seeks to make a profit through the purchase and sale of foreign currencies it does not work free of charge. Customers pay for those services, by receiving a lower rate for currencies purchased and a higher rate for currencies sold.
The European Court agreed. A material factor in its judgment was that to hold that currency transactions were within the scope of VAT only if a commission or specific fee were charged would allow traders to avoid tax by seeking remuneration from the spread rather than from charging fees, which would distort competition between such traders and those which charge fees.
The judgment means that the Bank should be entitled to recover the input tax at the heart of this dispute, which apparently amounted to some £14m for the period April 1993 to July 1994. Customs & Excise have, since this decision, stated in their Business Brief that although they will implement the ECJ decision immediately, they will in some cases have already permitted some input tax attributable to Forex transactions to have been recovered on the "look through" basis, which they regard as a concessionary application of the law.
They have therefore stated that where input tax is now reclaimed in Forex transactions they will revisit all amounts that have been allowed historically before admitting the claim. They have also pointed out that it will only be possible to go back 3 years.
For further information please contact Mark Simpson, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 1ES, UK, Tel: + 44 113 284 7000
This article was first published in the Autumn 1998 Hammond Suddards Tax Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
The First National Bank of Chicago's London branch carries out foreign exchange dealing. It is a market maker and does not charge commission. Rather it buys and sells foreign currency at different prices, and hopes to make a profit from the spread. An issue arose between the Bank and Customs & Excise as to whether the transactions were within the scope of VAT, that is whether or not they were supplies of goods or services effected for consideration within Article 2 of the Directive.
The strange feature about this case is the position taken by each of the parties. Financial services are generally within the scope of VAT but specifically exempted from it. Customs would usually argue that supplies are within the scope of VAT, but in this case argued that they were not. The clue lies in input tax recoverability. The particular Forex deals in issue were conducted with parties outside Europe, and by operation of special rules while no VAT is due to Customs from currency sales, the Bank is entitled to recover input tax on overheads which are attributable to those sales.
Customs argued that the lack of any commission or fee charged by the Bank meant that there was no consideration moving to the Bank in return for its services of exchanging foreign currency. Consequently there could be no supply of goods or services for VAT purposes because an essential component, that there must be consideration, was missing. This is a nonsense in commercial terms. It is clear that the Bank sets its rates in such a way that it does effectively receive payment for its services. Where it seeks to make a profit through the purchase and sale of foreign currencies it does not work free of charge. Customers pay for those services, by receiving a lower rate for currencies purchased and a higher rate for currencies sold.
The European Court agreed. A material factor in its judgment was that to hold that currency transactions were within the scope of VAT only if a commission or specific fee were charged would allow traders to avoid tax by seeking remuneration from the spread rather than from charging fees, which would distort competition between such traders and those which charge fees.
The judgment means that the Bank should be entitled to recover the input tax at the heart of this dispute, which apparently amounted to some £14m for the period April 1993 to July 1994. Customs & Excise have, since this decision, stated in their Business Brief that although they will implement the ECJ decision immediately, they will in some cases have already permitted some input tax attributable to Forex transactions to have been recovered on the "look through" basis, which they regard as a concessionary application of the law.
They have therefore stated that where input tax is now reclaimed in Forex transactions they will revisit all amounts that have been allowed historically before admitting the claim. They have also pointed out that it will only be possible to go back 3 years.
For further information please contact Mark Simpson, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 1ES, UK, Tel: + 44 113 284 7000
This article was first published in the Autumn 1998 Hammond Suddards Tax Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
