RCB/5/07 VAT—further clarification of the treatment of foreign exchange transactions (forex) and transactions in other financial instruments
Revenue & Customs Brief, Issue 5. 26 January 2007
Business Brief 21/05 (BB/21A/05, Division V16.3) explained HMRC's position following the tribunal decision in Willis Pension Fund Trustees Limited (Willis) [VAT Decision 19183] and the implications of the decision for other businesses conducting forex transactions. The Tribunal found that the forex transactions Willis entered into were not supplies for VAT purposes.
This Brief article sets out HMRC's view on when forex transactions are supplies for VAT purposes and the implications this has for VAT recovery. It also outlines HMRC's view on any wider application of the decision to transactions in other financial instruments.
Determining if your forex transactions are supplies for VAT purposes
The tribunal decision in Willis applied to a very specific set of circumstances and, whilst some general principles can be drawn from the decision, care needs to be taken when seeking to give it wider application. The European Court of Justice (ECJ) judgment in First National Bank of Chicago (FNBC) [C-172/96] is the leading authority on the VAT treatment of forex transactions.
In Willis, forex deals were entered into for the purposes of “hedging”. This is a term that is variously defined, but “hedging” is about reducing exposure to risk of loss resulting from fluctuations in some commodity or financial market. What is relevant for VAT purposes is whether any underlying trade is performed to achieve that objective. “Hedging” is not in itself a test for