HM Revenue and Customs Brief 28/10
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Issued 15 June 2010
VAT: liability of non-compliance carbon credits and carbon offsetting
Revenue & Customs Brief 52/07 ‘Place of supply of trading allowances in
greenhouse gas emissions’ stated that further guidance would be issued on the
VAT treatment of non-compliance carbon credits. This is covered in this Brief
alongside the VAT treatment of carbon offsetting services. Revenue & Customs
Brief 52/07 is no longer extant, having been superseded from May 2008 by
guidance published in Notice 741 Place of Supply of Services (until December
2009) and since 1 January 2010 by the new Notice 741A Place of Supply of
This Brief covers the VAT treatment of supplies of carbon credits and
services provided by carbon offset providers. For the purposes of this brief,
‘carbon offset providers’ offer advice and/or the facility to reduce an
individual’s ‘carbon footprint’.
Carbon credits fall into two categories:
- compliance market credits, which derive from the Kyoto Protocol and the EU
Emissions Trading System (‘EUETS’)
- non-compliance credits, of which the most common example is the Verified
Emission Reduction (VER)
The important distinction, for VAT purposes, between compliance market
credits and VERs is that the former are capable of consumption of the type
envisaged by the VAT system, and the latter are not. As VAT is a tax on
consumption, this means that compliance market credits are subject to VAT,
whilst VERs are outside the scope of VAT.
Compliance market credits
Compliance market credits are recognised under statutory ‘cap and trade’
regimes. Polluting businesses which are subject to these regimes must hold, or
obtain on the open market, and then ‘retire’ sufficient emissions credits to
cover their emissions. If they do not, then they will suffer financial
penalties. The credits are consumed to enable businesses to engage in economic
activity without penalty, and to meet their Kyoto commitments.
Kyoto and the EUETS provide for exacting verification and regulatory
processes, which mean that both parties to a compliance market transaction are
able to attribute a subjective value to the credit units. The credits are widely
traded on national and international markets.
The motive of an individual paying for a credit does not matter, nor does it
matter what is done with it. Thus if a private individual buys a compliance
market credit, the supply of the credit to the individual is still taxable (even
though the individual is not subject to any regime) because the credit is
capable of consumption.
Examples of compliance market credits include Emission Reduction Units (ERUs),
Certified Emission Reductions (CERs) and EU Allowances (EUAs).
Verified Emission Reductions
A Verified Emission Reduction (VER) is essentially a promise that carbon has
been or may be reduced somewhere in the world. There may be a general benefit to
the reputation of a business (good PR/marketing/corporate responsibility) in
paying for a VER, but no particular service is rendered which can be identified
as a cost component of the business. There is therefore no consumption. No
service is being provided to an identifiable consumer and no benefit is being
provided which is capable of forming a cost component of the activity of another
person in the commercial chain.
Payment for a VER might produce a general social benefit, it might produce a
specified result, or it might give rise to a legal relationship with reciprocal
obligations. However, a taxable person’s income is relevant for VAT purposes
only if it constitutes the consideration for a supply of goods or services to a
consumer. The mere fact that something is or may be done in exchange for a
payment is insufficient to bring such a transaction within the VAT system. The
public at large cannot constitute a specific recipient of the kind which must
exist in order to give rise to a transaction chargeable to VAT.
Further, and in marked contrast to the situation with compliance market
credits, we have seen no evidence of the existence of a genuine secondary
trading market in VERs.
Carbon offset services
There are a growing number of businesses providing carbon offsetting
services. The range of services offered varies widely, but the VAT treatment of
any individual transaction will depend on the particular arrangements. Because
arrangements vary so widely, it is not considered practicable to provide
anything beyond general advice in this brief.
In many situations, when a member of the public makes a payment to a carbon
offset provider, there is no supply for VAT purposes. This is because there is
no identifiable, direct benefit being received by the member of the public in
return for their money.
Examples would be where a carbon offset provider makes a commitment that
funds paid across by members of the public will be used to fund overseas
projects, wind farms, development of environmentally friendly energy generation
projects etc. without making any supply of direct benefit to the person making
the payment. In such scenarios, the payment by the member of the public is
outside the scope of VAT.
A common arrangement is where an airline offers its passengers the facility
to offset the carbon emissions generated by their flights, perhaps via a third
party carbon offset provider. Generally the passenger pays across an amount,
calculated to be the cost of offsetting the resulting emissions, but receives no
identifiable, direct benefit in return. There are a number of possible variants,
- the passenger has no choice, being obliged to pay the offsetting charge -
the airline is making a single zero-rated supply of transport services
- the offsetting facility is optional, but a separate administration charge
is made to the customer for providing the service - the admin charge is
standard-rated, but the amount paid to offset provision is outside the scope
- the offsetting service is optional, there is no administrative charge, and
the entire payment goes to offset provision - the payment is outside the scope
In other situations, a carbon offset provider might make taxable supplies of
carbon credits (supplies of compliance market credits are currently zero-rated),
or of the purchase and ‘retirement’ of compliance market credits
(standard-rated), or of general advice on how an individual or a business can
improve its energy efficiency (standard-rated).
Input Tax recovery
Whether you are an offset provider, or simply a business incurring VAT in
order to offset your own carbon emissions, you must follow the usual rules to
determine whether any VAT incurred is Input Tax and the extent to which it is
Further information can be obtained from the HMRC website contact the
Helpline on Tel 0845 010 9000.
About the Author
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Article Published/Sorted/Amended on Scopulus 2010-06-18 15:21:13 in Tax Articles