The UK Government today introduced legislation to remove VAT from supplies of emissions allowances (also known as carbon credits) traded within the UK, in order to prevent the risk of VAT fraud, Financial Secretary to the Treasury, Stephen Timms has announced.
The new law, which takes effect from midnight tonight, follows evidence that commodity trading in emissions allowances is being used by fraudsters to steal VAT revenues from the UK, and that the UK may become a major target for this activity in the coming months. The change will have no effect on legitimate trading but will prevent fraudsters from charging and collecting VAT which they have no intention of paying to HMRC.
Similar measures have been taken by the Governments of France and the Netherlands to prevent this form of fraud. The UK Government has sought a derogation from EU law to cover this short-term action pending agreement with EU partners on an EU-wide solution.
From midnight, supplies of emissions allowances in the UK will be subject to the zero-rate of VAT. A zero-rate is still a taxable supply which means that although no VAT is charged, thereby removing the opportunity to steal VAT, the seller can generally reclaim VAT on any purchases that relate to those sales. This ensures that the legitimate trade will not incur additional tax costs from this change.
The threat became apparent after fraudulent trading on the Bluenext exchange prompted the French government to remove VAT from supplies of emissions allowances in France. The Government of the Netherlands has also made VAT changes in respect of emissions allowances trading.
The UK Government is actively engaged in discussions with the European Commission on establishing an EU-wide solution to this threat. However, UK monitoring indicates that there now exists a substantiated and increasing risk of the UK becoming a major target for the fraudsters during the next few months. This risk assessment is informed by HMRC’s experience in recent years of VAT Missing Trader Intra-Community (MTIC) fraud in mobile telephones and computer chips. We have seen how quickly frauds of this kind can escalate and how effective decisive action can be in tackling them.
Legitimate business has been keen to see a swift response from the Government, to ensure that the integrity of the EU Emissions Trading Scheme is not undermined by fraudulent trading.
