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VAT dropped from carbon credits

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The government has acted to prevent the risk of fraud by removing VAT from carbon credits.

The concern is that criminals may sell carbon credits within the UK but then fail to pay the VAT to HM Revenue and Customs (HMRC).

Carbon credits help to determine the CO2 emissions that a business produces. Firms that want to produce more emissions than their quota allows must buy credits.

The change was announced by Stephen Timms, the Financial Secretary, and took effect as from 30 July.

The UK government believes the system is open to fraud. In its statement, the Treasury said: “The new law 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.”

The measure is a temporary one until there is agreement on an EU-wide solution to the problem of carbon credit VAT fraud.

The Treasury went on to point out that, although 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, despite no VAT being charged, 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.