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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 announced today.

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.

Notes to Editors

1. 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.

2. 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.

3. 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.

4. 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.

5. Because trading in emissions allowances is predominately between businesses which can reclaim VAT on purchases, this measure has a negligible cost but effectively removes the opportunity to perpetrate fraud. So legitimate trade is protected, and fraudsters are the only ones to lose from the Government’s action.

6. MTIC fraud arises where (to make EU trade easier) VAT standard-rated goods or services are effectively traded VAT free between EU Member States (because the VAT is due in the country in which the customer belongs, meaning that the VAT can be accounted for and simultaneously reclaimed by the customer). The customer then has the opportunity to charge VAT on its onward domestic supply and disappear without accounting for the VAT due.

7. The existence of a strong secondary cross-border market in emissions allowances generates very high volume, value and speed of trade. This, combined with the fact that EU emissions allowances only go to final consumption once a year provides fraudsters with multiple opportunities to steal VAT following cross-border acquisitions.

8. HMRC continues to work with legitimate businesses and financial institutions to identify and tackle those involved in any criminal or fraudulent action within the UK.

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