Revenue & Customs to restore VAT on carbon credits

HM Revenue & Customs (HMRC) has announced that it will reintroduce VAT charges on carbon credits from November after removing the levy last year in response to a multi-billion euro tax fraud.

British officials approved a zero VAT rating on trades of EU allowances (EUAs) in July last year after a pan-European investigation revealed that criminal gangs were using carbon credits to commit a widespread VAT fraud known as carousel fraud.

Nearly 30 arrests have now been made in at least 11 countries, including the UK, France and Germany, with the Europol police agency estimating the fraud cost treasuries across the EU around €5bn over an 18-month period.

Carousel fraud, which is also known as missing trader fraud, occurs when fraudsters set up a front company that collects VAT on the sale of a product before then disappearing with the money that is owed to the exchequer.

HMRC initially took emergency measures to combat the problem, removing VAT on carbon credits, when it emerged the carbon market was being targeted. But following an EU-wide agreement in March this year, officials have confirmed they now impose a new form of reverse VAT on carbon credits, which minimises the risk of fraud by making the company that purchases credits responsible for paying the VAT on any trade.

"The criminal practice of exploiting carbon credits to generate fraudulent VAT repayments was stopped last year when carbon credits were zero rated for VAT purposes," said a spokeswoman for HMRC. "This move was always intended as an interim measure until the legislation necessary to introduce a reverse charge could be put in place."

In a notice placed on HMRC's website late last week, officials confirmed the new reverse VAT regime would come into effect from November 1 and would cover EUAs, as well as UN-approved Certified Emission Reduction (CER) and Emissions Reduction Units (ERUs) carbon offset credits.

Reverse charge VAT is already in place in the UK for other products such as mobile phones and computer chips that have been subject to carousel fraud and experts predict the move is unlikely to have a major impact on the carbon market.

"Bona fide traders are well used to dealing with VAT, so they should be able to handle this change fairly easily," observed Trevor Sikorski, director of carbon markets research at Barclays Capital.