Asymmetric slippage: VAT consequences

The recent publication of the FCA’s Market Watch has highlighted the so-called asymmetric slippage issue, whereby price movements may be detrimental to the trader. This is when the price has moved between order placement and order execution, the trader is liable if the price has increased, but the FX broker benefits through 'positive slippage' if the price has decreased.

The Regulator’s view regarding the practice of 'best execution' is well known, but what about any VAT consequences? Positive slippage is retained by the broker, and presumably treated as a form of income. Under a turnover-based Partial Exemption Special Method (PESM), such income could impact on the recovery rate to be applied to input tax, increasing it if it were treated as non-EU, and decreasing it if EU.

As the FCA has now determined that it was not the broker’s income all along, this could mean a re-working of a broker’s partial exemption position for the last four years, with a consequent adjustment required for any under or over-claimed input tax.

The FCA is expecting to publish the results of its review of best execution practices in different markets at the end of Q2 2014, at which time businesses will know whether or not they might also have a VAT recalculation to make.

If you think you may be affected, please contact Nick Warner.


Nick Warner

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