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.
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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