Exempt finance - derivatives

By Tolley
Exempt finance - derivatives

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Exempt finance - derivatives
  • Futures contracts
  • Exchange trading
  • Options contracts
  • Other types of trading contracts
  • Conclusion

Derivatives are financial instruments whose value is based on the value of the underlying commodity, financial instrument or currency. In order to determine the correct VAT liability of a derivative the business or its adviser will need to ascertain the nature of the underlying supply and its associated VAT treatment. This guidance note provides information on the VAT treatment of the derivative and not the actual underlying product. If the business is acting as an agent or intermediary involved in these types of transactions, see the Exempt finance - intermediaries guidance note for more information.

VATFIN6000; VAT Notice 701/49: finance 

If the business is dealing with commodities traded on qualifying terminal markets, see De Voil Indirect Tax Service V4.208.

Futures contracts

A futures contract is an agreement to buy or sell a fixed amount of a particular commodity, currency or security on a specified date in the future agreed by the parties on the date the agreement was signed. Financial futures include currencies, interest rates and securities and these transactions are exempt from VAT. There are various types of future contracts and these are explained below.

VATFIN6200
Is the contract a financial derivative?

In order to determine the correct VAT treatment the business or its adviser needs to have answers to the following questions:

  • what is the underlying transaction - is the trading derived from a financial instrument, a commodity or something else?
  • is the underlying supply goods or services?
  • are the parties involved members of the commodities exchange listed on the Terminal Markets Order (TMO)? ― see De Voil Indirect Tax Service V4.208
Cash settled contracts

These are contracts where there is no underlying deliverable security or contract and can therefore only be settled via

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