HM Revenue and Customs Brief 46/09
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Issued 30 July 2009
VAT: Zero rating of emissions allowances with effect from 31 July 2009
In response to the escalating threat of VAT fraud in connection with trading
of emissions allowances (often called ‘carbon credits’), the Government has
introduced legislation to zero rate the supply of emissions allowances within
the UK with effect from 31 July 2009. This is an interim measure that the
Government expects to remain in force until an EU-wide solution is implemented.
It follows similar action taken by France and the Netherlands earlier in the
summer. The UK has applied to the EU for a retrospective derogation to remove
VAT from these products.
Emissions allowances or ‘carbon credits’ are issued by governments under
various schemes designed to cut carbon emissions by businesses. Within the
European Economic Area, member states issue operators in the EU scheme with EU
Allowances (EUA) - carbon credits - and further credits are auctioned by some
governments (including the UK). The EUAs can be traded and there is also a
secondary market in which anybody can trade, for example to speculate on the
price of the credits. Operators (or ‘polluters’) must ensure they have
sufficient credits to cover their actual emissions at the end of April each year
when these credits are ‘retired’.
The opportunity for Missing Trader Intra-Community (MTIC) VAT fraud arises
where standard-rated goods or services can effectively be traded VAT free
between EU Member States. Up to now, most emissions allowances have been
standard-rated in UK to UK transactions and VAT free when purchased from outside
the UK by a UK based company. It is this VAT free source that provides the
opportunity to perpetrate MTIC VAT fraud. It occurs where the UK company
purchasing the emissions allowances from overseas sells them to another UK
company, charges VAT but then fails to pay it over to HMRC and disappears.
The ability to trade freely in emissions allowances is an important feature
of the EU Emissions Trading Scheme. However, 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 EUAs are only surrendered
once a year provides fraudsters with multiple opportunities to steal VAT
following cross-border acquisitions.
Although there is currently no specific provision in EU law to introduce this
measure, the UK Government believes that it is in the public interest that steps
be taken now to prevent substantial potential losses to the Exchequer and to
ensure that the legitimate market is not undermined by fraudulent trading.
Although a number of other options were considered, zero rating was the only
option that could be introduced quickly enough in the UK and without any
significant impact on legitimate trade in the markets concerned.
The zero rate will apply to any transaction in EU emissions allowances and
transferable units issued pursuant to the Kyoto Protocol. This will include over
the counter spot trades, transactions for future delivery and options.
Cross-border transactions are not affected.
Certain trades carried out on specific exchanges are currently treated as
zero-rated based on the provisions of the Terminal Markets Order 1973 (TMO).
This measure will effectively overlay those provisions and not affect them
directly, except to the extent that transactions currently subject to VAT, such
as when emissions allowances are consumed by members of the markets, will all
The tax point for these supplies will be the earliest of either the transfer
of title or payment. Therefore any amount purporting to be VAT on tax invoices
dated from 31 July 2009 will not be recoverable as input tax.
What if I can’t stop accounting for VAT in time?
We understand that this is extremely short notice for businesses to be able
to change their systems in time and will bear this in mind when considering what
action to take in cases where VAT has been charged or reclaimed when it should
not have been. Such cases will be looked at on an individual basis. However,
given that the fraud relies on VAT funnelling down supply chains to a potential
fraudster, businesses are advised to stop paying VAT on affected purchases as
soon as the zero rate comes into effect.
Please contact the National Advice Service on 0845 010 9000 or your nominated
HMRC contact should you have one.
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Article Published/Sorted/Amended on Scopulus 2009-08-01 13:16:08 in Tax Articles