Government action to tackle VAT fraud on carbon credits
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30 July 2009
The UK Government today
introduced legislation to remove VAT from supplies of emissions allowances (also
known as carbon credits) traded within the UK, in order to prevent the risk of
VAT fraud, Financial Secretary to the Treasury, Stephen Timms announced today.
The new law, which takes effect
from midnight tonight, follows evidence that commodity trading in emissions
allowances is being used by fraudsters to steal VAT revenues from the UK, and
that the UK may become a major target for this activity in the coming months.
The change will have no effect on legitimate trading but will prevent fraudsters
from charging and collecting VAT which they have no intention of paying to HMRC.
Similar measures have been
taken by the Governments of France and the Netherlands to prevent this form of
fraud. 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.
1. From midnight, supplies of
emissions allowances in the UK will be subject to the zero-rate of VAT. A
zero-rate is still a taxable supply which means that although no VAT is charged,
thereby removing the opportunity to steal VAT, the seller can generally reclaim
VAT on any purchases that relate to those sales. This ensures that the
legitimate trade will not incur additional tax costs from this change.
2. 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 Government of
the Netherlands has also made VAT changes in respect of emissions allowances
3. The UK Government is
actively engaged in discussions with the European Commission on establishing an
EU-wide solution to this threat. However, UK monitoring indicates that there now
exists a substantiated and increasing risk of the UK becoming a major target for
the fraudsters during the next few months. This risk assessment is informed by
HMRC’s experience in recent years of VAT Missing Trader Intra-Community (MTIC)
fraud in mobile telephones and computer chips. We have seen how quickly frauds
of this kind can escalate and how effective decisive action can be in tackling
4. Legitimate business has been
keen to see a swift response from the Government, to ensure that the integrity
of the EU Emissions Trading Scheme is not undermined by fraudulent trading.
5. Because trading in emissions
allowances is predominately between businesses which can reclaim VAT on
purchases, this measure has a negligible cost but effectively removes the
opportunity to perpetrate fraud. So legitimate trade is protected, and
fraudsters are the only ones to lose from the Government’s action.
6. MTIC fraud arises where (to
make EU trade easier) VAT standard-rated goods or services are effectively
traded VAT free between EU Member States (because the VAT is due in the country
in which the customer belongs, meaning that the VAT can be accounted for and
simultaneously reclaimed by the customer). The customer then has the opportunity
to charge VAT on its onward domestic supply and disappear without accounting for
the VAT due.
7. The existence of a strong
secondary cross-border market in emissions allowances generates very high
volume, value and speed of trade. This, combined with the fact that EU emissions
allowances only go to final consumption once a year provides fraudsters with
multiple opportunities to steal VAT following cross-border acquisitions.
8. HMRC continues to work with
legitimate businesses and financial institutions to identify and tackle those
involved in any criminal or fraudulent action within the UK.
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Article Published/Sorted/Amended on Scopulus 2009-08-01 13:11:03 in Tax Articles