EU introduce reverse VAT for carbon trading

The European Commission has approved a reverse payment scheme for VAT charges on carbon trading to reduce the risk of fraud.

The UK implemented a zero rate of VAT on carbon trading in September this year in the hopes of minimising fraudulent activity wiping off approximately £50bn in cash flow at the Treasury.

The change was made to prevent companies fraudulently receiving VAT reimbursements on carbon trades where VAT was not paid to the Treasury. The scam is similar to carousel fraud, but emission certificates are easier to trade and more transferable than physical goods.

The EU directive, which was proposed on 29 September 2009, suggests a reverse payment method that involves a company sending invoice-like documents to the Treasury paying the VAT and requesting a refund within the same paperwork with the company effectively paying nothing.

The directive is currently optional with a number of conditions which could have a direct impact on the market.

Frank Sangster, head of environmental taxes at KPMG, said: “Whilst we welcome a swift, pan-European response from the Commission, the fact that the proposed Directive is optional means that the potential for a number of different VAT treatments within the EU remains."

"In addition to this, there is a risk that the control and reporting obligations required to be implemented under the Directive could constitute a significant burden for market participants if overzealously implemented by Member States."

Sangster agrees that the move is a step in the right direction but in order for a company to use the reverse payment scheme they will need to introduce control measures and adhere to reporting obligations in order to "provide assurance that the measure is working effectively".

The directive is only applicable until December 2014 with the new measures to be adopted over the next four to eight weeks.

Further reading:

Carbon VAT fraud crackdown