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HM Revenue and Customs Brief 35/10


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Issued 20 August 2010

VAT: proposed reverse charge accounting for businesses trading in emissions allowances


Budget Note 49 (24 March 2010) announced the introduction of legislation for a reverse charge with effect from 1 November 2010.

The purpose of this Brief is to share the draft legislation and provide guidance on how the reverse charge for emissions allowances will operate.

Who needs to read this?

Business selling or purchasing emissions allowances in the UK.


A zero rate for emissions allowances was introduced on 31 July 2009 as an interim measure to halt rapidly escalating MTIC fraud in this area, pending agreement on a common EU-wide countermeasure (Revenue & Customs Brief 46/09). A Directive providing an option for all Member States to introduce a reverse charge was adopted in March 2010.

Timing and Scope of Implementation

With effect from 1 November 2010 (subject to Parliamentary process) the reverse charge accounting mechanism will apply to:

  • a transfer of an allowance, as defined in Article 3 of Directive 2003/87/EC (concerning the EU emissions trading scheme)
  • a transfer of an emission reduction unit which can be used by an operator for compliance with the scheme established by the Directive
  • a transfer of a certified emission reduction which can be used by an operator for compliance with the scheme established by the Directive

The reverse charge will not apply to supplies of options for emissions allowances which are not covered by the EU legislation permitting the reverse charge.

At the same time the temporary zero rate for emissions allowances, including options, will be withdrawn. These changes do not affect the application of the Terminal Markets Order under which certain transactions on specified markets are zero-rated.

The reverse charge mechanism

Under the reverse charge accounting mechanism, it is the responsibility of the customer, rather than the supplier, to account to HM Revenue & Customs (HMRC) for VAT on supplies of the specified emission allowances. As is the case with the mobile telephone and computer chip reverse charge it will only apply to business to business transactions in the UK. However, there are two key differences between these measures, which are:

  • there is no ‘de minimis’ rule excluding supplies under £5,000 so the reverse charge applies to all specified supplies of emission allowances
  • businesses will not be required to complete a Reverse Charge Sales List

Completion of the VAT Return

Suppliers of goods under reverse charge accounting must not enter in box 1 of the VAT Return any output tax on sales to which the reverse charge applies, but must enter the value of such sales in box 6.

Customers must enter in box 1 of the VAT Return the output tax on purchases to which the reverse charge applies, but must not enter the value of such purchases in box 6. They must reclaim the input tax on their reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.


When making a sale to which reverse charge accounting applies, suppliers must:

  • show all the information normally required to be shown on a VAT invoice
  • annotate the invoice to make it clear that the reverse charge applies and that the customer is required to account for the VAT

The amount of VAT due under the reverse charge rules must be clearly stated on the invoice but should not be included in the amount shown as total VAT charged. The precise wording is not prescribed in law and discussions with business have highlighted the need to keep the annotation short. Either of the following would be acceptable:

  • customer to pay output tax of £X to HMRC
  • UK customer to pay O/T of £X to HMRC

Alternatively, any of the following would also be acceptable, provided that the amount of tax is shown elsewhere on the invoice (but not in box for total output tax charged):

  • VAT Act 1994 Section 55A applies
  • s55A VATA 94 applies
  • customer to account for the VAT to HMRC
  • reverse charge supply – customer to pay the VAT to HMRC
  • customer to pay VAT to HMRC
  • UK customer to pay VAT to HMRC

Detailed guidance on the reverse charge mechanism can be found in Notice 735: VAT reverse charge for mobile phones & computer chips.

Draft Legislation

Statutory instruments will bring the relevant changes into effect:

  • the Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies) Order, which specifies the supplies to which the reverse charge applies (Annex A)
  • the Value Added Tax (Amendment) Regulations, which amend Regulations 38A, 55C(6) and 58(2)(g) of the VAT Regulations to reflect the fact that section 55A may now apply to supplies of services as well as goods (Annex B)
  • The Value Added Tax (Emissions Allowances) Order, which removes the temporary zero rate (Annex C)
    Drafts of these instruments as they are expected to be made are attached for information.

Further information

Further information can be obtained from the HMRC website or by contacting the Helpline on 0845 010 9000.

Annex A

The Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies) Order (PDF 30K)

Annex B

The Value Added Tax (Amendment) Regulations (PDF 24K)

Annex C


About the Author

© Crown Copyright 2010.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2010-08-27 19:16:54 in Tax Articles

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