The British government has been ordered to pay the European commission’s legal costs after being successfully sued for granting City traders a tax break without EU permission.
The European court of justice ruled that the UK breached an EU directive by failing to notify Brussels of a zero rate of VAT given to commodities traders over the last four decades.
The UK is now expected by Brussels to seek the authorisation of the 27 member states or drop the policy, which it is claimed has unfairly boosted the City of London at the expense of other EU financial centres.
A Treasury spokesperson said: “We are reviewing the decision of the European court of justice and will provide further details on next steps in due course.
“The decision does not require businesses to pay any VAT on historic transactions, and the law applying to derivatives trades today means no VAT is due. That will remain the case while the UK considers next steps in light of the ruling.”
Separately, the EU has launched infringement proceedings against the British government for failing to comply with EU law on the free movement of its citizens and their family members.
The government is accused of limiting the rights of first-time jobseekers from other EU countries, as well as putting restrictions on the rights of their family members. The charges, which date back to 2014, also include imposing “illegal” lifetime re-entry bans on some people.
The British government has been given four months to notify the commission that it has fully transposed EU laws on free movement into UK law. There are concerns that the gaps might affect the implementation of citizens’ rights under the withdrawal agreement after the end of the Brexit transition period.
The UK left the EU on 31 January but under the terms of the withdrawal agreement the country remains under the jurisdiction of the bloc’s court in Luxembourg until the end of the transition period on 31 December 2020. Legal cases launched by Brussels will remain live for four years once the transition period is over, and for eight years when concerning citizens’ rights.
The European court of justice could in theory fine the government even when the UK is long gone from the EU’s structures.
The twin legal developments will inevitably fuel the arguments of those opposed to an extension of the transition period, during which the UK remains in the single market and the customs union.
The row over the tax breaks began in 2018 when the commission claimed that the UK had been gradually extending the scope of VAT zero rates initially given to trades in the future prices of metal, rubber, coffee, sugar, vegetable oil, wool, silver grain, barley and cocoa granted in the late 1970s.
The UK government accused the commission of not understanding a “complex series of restructurings” of the trade in so-called futures and of being overly “formalistic”.
The EU’s executive disputed that claim, arguing that the extension of zero-rating to a new range of trading was “not purely formal and were not undertaken simply to take account of the restructuring process” but had allowed “increasingly complex types of instruments, traded on increasingly complex markets” to escape the tax.
It was claimed the VAT zero rate had been extended without due notification to trades on the London potato futures market, the International Petroleum Exchange of London, the London meat futures market, the London platinum and palladium market, the London Securities and Derivatives Exchange Ltd and the London bullion market.
The court’s judges, led by a French jurist, Jean-Claude Bonichot, agreed with the commission that the lack of notification did amount to a breach of the EU’s directives. The court added that the judgment held no sway on whether authorisation should be given if it was sought.