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
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
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options, will be withdrawn.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
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
- 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.
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
- 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
- The Value Added Tax (Emissions Allowances) Order, which removes the
temporary zero rate (Annex
Drafts of these instruments as they are expected to be made are attached for
Further information can be obtained from the HMRC website or by contacting
the Helpline on 0845 010 9000.
The Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies) Order
The Value Added Tax (Amendment) Regulations (PDF 24K)
About the Author
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Article Published/Sorted/Amended on Scopulus 2010-08-27 19:16:54 in Tax Articles