UK Drops VAT Payments on Carbon Credits

On 31 July the British government introduced legislation that had the effect of dropping the need for VAT payments previously made on carbon credit trading within the UK. This was done to address the real risk of fraud occurring in the ever growing carbon trading sector.

Throughout much of the EU carbon credits have historically been traded between member states without the need to pay VAT. The rationale is that those trading the carbon credits would be businesses that could immediately reclaim the VAT. So far, so much sense.

Fraudsters, however, had begun seeking to purchase VAT free carbon credits from those member states and then sell them to UK buyers with the VAT charged on top. The fraudster vendors then pocket the entire sale price, along with the VAT charged, and promptly disappear without passing on the taxes due to the government.

In August of this year HM Revenue & Customs made seven arrests as part of an investigation into an alleged £38m VAT fraud along exactly these lines.

The UK is not the first member state to have taken action over this issue. Both France and the Netherlands have reduced the VAT element of these carbon credit trades - so perhaps it is not surprising that the UK has followed suit.

The question now is whether and to what extent these fraudulent trades have manipulated the UK and broader European carbon trading statistics. With the removal of the VAT element in the UK will we now witness a slide in the total number, and value, of this type of emissions trading?

Certainly that is something that some lobbyists might like to see, given they seem convinced carbon trading is nothing more than a profit making machine rather than a bona fide method of cutting carbon emissions. Any data produced over the coming months will make for interesting reading - and perhaps some intriguing conclusions.