Jonathan Shopley

News that VAT is chargeable on carbon offsetting in the UK seems to have caused some consternation.

Although this has come as a shock to some, it should not really be that surprising as a large number of carbon offsetting businesses have always charged VAT on offsets. However, this shock reflects the confusion that has existed in the UK since the inception of carbon offsetting, and with gathered momentum over the last 12 months.

So, is Value Added Tax (VAT) due on the supply of offsetting services or not?

Some carbon offsetting businesses have been instructed by Her Majesty’s Revenue & Customs (HMRC) to charge VAT on their services in the UK, while others have been advised that offsetting is simply the making of donations to " projects" and therefore the money received for offsetting is outside the scope of the European Union's rules on VAT. The confusion has been made worse as a number of carbon offsetting entities have established themselves as charities or not-for-profit organisations. As a result, there has been an incorrect assumption that the activities of these organisations must be outside the scope of VAT due to their charitable/not-for-profit status.

This does nothing to give consumers or business confidence in the carbon offsetting business – what it is, how it is executed, how much it costs. This is particularly the case where the buyer is not in a position to recover any VAT charged (e.g. a bank).

We believe that HMRC needs to sort out the confusion once and for all with a Business Briefing, settling – nationally – whether VAT is to be charged or not. The issue boils down to whether someone is paying something in return for something or, in other words, is there cause and effect?

We strongly believe that the answer to this must be 'yes'. If you (business or consumer) pay £1 for 1 tonne of CO2 to be offset, that's what you need to know happens. It has to be guaranteed. You aren't paying for 'best efforts'. After all if the 1 tonne is not delivered, you have not offset anything, and both you and the environment have been failed. Of course, you could make a donation to an emission reduction project – but that's an entirely different no-strings-attached donation and there is no offsetting happening.

We also believe that all the mess around charity/not for profit/business is undermining the enormous value carbon trading and offsetting can bring.

We have always charged VAT on our offsets and are working with HMRC and the UK’s Department of Environment, Farming and Rural Affairs (DEFRA) to try and obtain clarity on VAT liability. Recently, a leading tax counsel, Paul Lasok QC provided his written opinion that this was a black and white case. He said that carbon trading and carbon offsetting are business activities, and in accordance with current UK and European indirect tax legislation, clearly subject to VAT. The UK has little room for manoeuvre within European taxation law, and would need to pull carbon activities in line with the legislative framework. This applies whether the transactions are on a regulated or voluntary basis, whether the instruments (credits) are Verified Emission Reductions (VERs), Certified Emission Reductions (CERs) or other regulated instruments, and whether the organisation concerned is established as a corporate body/charity/not-for profit entity.

In other words, whether we like it or not, carbon offsetting is subject to VAT rules as set by the EU. If we want this to change, the UK Government will need to approach the EU and have carbon offsetting zero rated for VAT. We support this and believe it would be good news for offset providers, businesses, consumers and for the environment.

In the meantime, however, we believe it is important for DEFRA and HMRC to set the rules in a way that reflects EU regulations, and to bring clarity to the market.

Jonathan Shopley is executive director of carbon offset provider The CarbonNeutral Company.