Government Takes Action To Tackle VAT Fraud On Emissions Allowances

Author:Mr Vivek Gambhir
Profession:CMS Cameron McKenna LLP

On 31 July 2009, the Treasury introduced the Value Added Tax

(Emissions Allowances) Order 2009 (SI 2009/2093) that removes VAT

from supplies of emission allowances traded within the UK in order

to prevent the risk of VAT fraud. This development will be of

interest to companies subject to the EU Emission Trading Scheme as

well as other companies involved in carbon trading.

The new law that took effect from midnight on 31 July 2009 means

that supplies of emission 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.

As trading in emissions allowances is predominately between

businesses which can reclaim VAT on purchases, the Government

expects that this measure will have a negligible tax cost, but that

it will effectively remove the opportunity to perpetrate fraud

whilst having no effect on legitimate trading.

The change in VAT law is the latest attempt by the UK to combat

the fraud known as Missing Trader Intra-Community or Carousel

fraud. This type of fraud is basically tax evasion in its simplest

form where a trader charges and collects VAT, but fails to account

for this VAT to HMRC and disappears before HMRC can pursue them.

Previous changes targeted small high volume traded items such as

mobile phones and computer chips, but it appears that there is now

evidence that the similar hallmarks of emissions allowances trading

have attracted fraudsters.

Next Steps

Although similar measures have recently been taken by the

governments of France and the Netherlands, the changes mean that

there is not currently a harmonised EU-wide position on VAT on

emissions allowances. The UK Government is actively engaged in

discussions with the European Commission in order to establish an

EU-wide solution but there is no indication yet when this might


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