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 arrive.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 05/08/2009.