UK drops VAT from carbon credits in effort to prevent fraud

The government today introduced legislation to remove VAT from carbon credits traded within the UK to prevent the risk of VAT fraud in the fast-expanding carbon trading sector.

The new law, which takes effect from midnight tonight, follows evidence that commodity trading in the EU Emissions Trading System is being increasingly targeted by fraudsters as a way to steal VAT revenue from the UK.

Carbon credits are effectively traded VAT-free between EU member states because trading is predominately between businesses which can immediately reclaim VAT on purchases.

But according to the government, fraudsters have been taking advantage of this loophole by buying VAT-free credits from other countries and selling them to domestic buyers and charging them VAT. The sellers then disappear without paying the tax to the government.

The high volume, value and speed of trade in emissions allowances – combined with the fact that they are handed to the authorities managing the emissions trading scheme only once a year – makes them particularly attractive to fraudsters, the government said.

The threat became apparent after fraudulent trading on the Bluenext exchange prompted the French government to remove VAT from supplies of emissions allowances in France. The Netherlands quickly followed suit and now the UK has done likewise.

Andreas Arvanitakis, senior analyst at Point Carbon, said the move by the UK was pre-emptive.

"The suspicion was that it was affecting trade volumes but we don't know how much of a grip it had really taken in the UK," he said. "There are some dodgy companies that have started to crop up in the past three to four months who are keen to trade at a time when carbon prices are down."

The Treasury today said it is also seeking an EU-wide solution to the problem. "The UK government has sought a derogation from EU law to cover this short-term action pending agreement with EU partners on an EU-wide solution," the department said in a statement.