HMRC say the circumstances in Willis were very specific, and care needs to be taken when trying to give it wider application. The ECJ’s decision in First National Bank of Chicago remains the lead case on the VAT treatment of forex transactions.
The Brief outlines the practice of ‘hedging’ adopted by Willis, a practice used to reduce exposure to risk of loss resulting from currency fluctuations. HMRC say, however, that hedging is not itself a test for determining whether there is a supply for VAT purposes.
HMRC’s view is that forex transactions are supplies for VAT purposes whenever a ‘spread’ position is adopted over a period of time for buying and selling currency (a spread position means a difference between a bid price and a sell price from which you expect to derive a profit). HMRC say that where there is uncertainty as to whether forex activities fall within the principle of adopting a ‘spread position’, where a business is able to set the selling price, it will also be able to determine the consideration due by setting a spread. As such, its activities are likely to be supplies for VAT purposes, and will be exempt under item 1, Group 5, Schedule 9, VAT Act 1994.
HMRC give the following examples of when forex transactions are unlikely to be supplies for VAT purposes:
A business simply exchanging one currency for another to realise foreign earnings into sterling
Acquiring currency to settle liabilities incurred outside the UK
Entering into forex deals to limit an exposure to forex fluctuations for future obligations
HMRC caveat the three examples by adding that they should not form part of a wider economic activity being carried out for an identifiable consideration.
Intermediaries acting in relation to a forex transaction can exempt their services whether or not the underlying forex transaction is a supply for VAT purposes.
In terms of input tax recovery, HMRC say the normal rules apply. Businesses making supplies of finance cannot normally recover associated input tax unless the recipient is located outside the EU. However, input tax relating to forex transactions not seen as supplies for VAT purposes, can be treated as residual input tax.
Intermediaries can recover associated input tax where the recipient of their services is outside the EU, or the underlying forex transaction is a supply made outside the EU.
However, where the underlying forex transaction is not a supply for VAT purposes, but the recipient is located in the UK or elsewhere in the EU, there is no right to input tax recovery.
HMRC say that businesses may wish to clarify their current partial exemption methods with them, as some may now need to be revised.
