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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.

EU legislation

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.

Supplies affected

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.

Terminal Markets

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 become zero-rated.

Tax points

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.

Further information

Please contact the National Advice Service on 0845 010 9000 or your nominated HMRC contact should you have one.

About the Author

© Crown Copyright 2009.

A licence is need 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 2009-08-01 13:16:08 in Tax Articles

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