Issue 25

EU Gold Directive

By Henry Kozlowski
Johnson Matthey Plc

By Douglas Beadle
Rothschild & Sons Limited

The EU Gold Directive, adopted in Brussels on 12 October 1998, became effective in the UK on 1 January 2000. Since then, "investment" gold (see inset for definition) has no longer been subject to Value Added Tax across any of the 15 member states of the European Union. The LBMA worked closely with H.M. Customs and Excise to make the legislation a reality and is indebted to the VAT Policy Directorate for being the driving force behind the legislation.

The LBMA had two objectives in supporting the implementation of' the EU Gold Directive.

  • Establish a level playing field for investment gold across Europe and eliminate the various disadvantages faced by individual member states.
  • Protect the unique requirements of the London Market as the world's main bullion clearing centre whilst recognising that such benefits should not be the exclusive the prerogative of London.

Both these objectives have been achieved. In order to accommodate the longstanding special requirements or London which were covered by various pieces of historical legislation, the amending UK legislation giving effect to the EU Gold Directive was by necessity complex, but can be summarised as follows:

  • Sales of investment gold to individuals in their private capacity are exempt. This brings investment gold into line with other forms of investment in the UK.
  • Sales of investment gold between members of the LBMA are zero-rated. This allows market members to continue trading between themselves, as before, without incurring additional costs, which are an inherent part of VAT exemption. This point is explained in greater detail below.
  • Sales of investment gold between an LBMA member and a UK-taxable non-member are standard rated, but subject to the reverse charge mechanism under the provisions of the Special Accounting Scheme for Gold Transactions ( introduced in the UK in April 1993 as a means of reducing VAT fraud on gold transactions). The scheme achieves this by transferring the responsibility for paying the VAT due to Customs and Excise on certain gold transactions from the seller to the buyer. Hence no VAT changes hands. The scheme is also beneficial for the purchaser as it eliminates funding of VAT.
  • Special provisions were put in place to cater for transactions between an LBMA member and a non-UK counterpart. These allow the LBMA member rather than its non-UK customer to account for VAT on investment gold transactions, should it arise, thereby avoiding the cost and inconvenience to the customer of having to register for VAT in the UK.

The new legislation incorporates a provision allowing the seller in a transaction in investment gold to "opt to tax", a provision particularly important for refiners, manufacturers and bullion traders alike. This enables the supplier of investment gold to treat his supply as standard rated (currently 17.5%) rather than exempt.

Investment Gold

The exemption of VAT on gold applies to :

  • Gold in the form of bar or wafer of weights accepted by the bullion markets with a fineness of at least 995. Small bars or wafers weighing less than one gram are excluded. Note: gold grain, wire etc are not investment gold.
  • Non-numismatic coins of a purity greater than 900/1000 minted post- 1800 which are or have been legal tender in their country of issue or which have been admitted to the approved list of investment gold coins by a Customs Authority. The premium on the coin must not exceed 80% of the open market value of the gold content. Each year before 1 July, the EU will draw up a list of coins which meet the criteria.
  • Gold-related securities and forward/ future transactions.

Why might a supplier choose to opt Lo tax and a UK VAT registered buyer choose to accept such an election? The advantage lies in the ability of the supplier to recover any VAT associated with the supply, whereas the purchaser would not be disadvantaged as the VAT charged would fall under the Special Scheme described above.

When an item is exempt from VAT, any VAT incurred in its processing or supply (for example, on office equipment) is not recoverable. If however, the underlying supply is taxable (standard rated or zero-rated), then the VAT on the ancillary costs becomes recoverable either in full or in part depending on the supplier 's Partial Exemption (VAT recovery) rate. Without the ability to opt to tax, the competitiveness of the market would have been undermined.

As for as the market in London as a whole is concerned, the new VAT legislation achieves the LBMA objectives outlined above.