Amendment to VAT reverse charge for emissions allowances
Published 24 March 2021
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Who is likely to be affected
Businesses registered or liable to be registered for VAT that buy or sell emissions allowances (also known as “carbon credits”).
General description of the measure
The measure will prevent a loophole in an existing domestic reverse charge for emissions allowances following the introduction of a UK emissions trading scheme (UK ETS) on 1 January 2021 by the Department for Business, Energy and Industrial Strategy (BEIS). This measure amends existing reverse charge legislation that was introduced in 2010 to prevent missing trader fraud and protect revenue. Such supplies include the transfer of allowances and other units recognised for the purposes of the European Union greenhouse gas emission trading scheme (EU ETS) established by Directive 2003/87/EC (the Directive).
The measure also removes the transfer of an “emission reduction unit” and the transfer of a “certified emission reduction” (international units) from the scope of the domestic reverse charge. This is because EU ETS no longer allows for these international units to be exchanged for EU ETS allowances and UK ETS also does not allow for these international units to be exchanged for UK ETS allowances.
Emissions allowances are issued by governments under various schemes designed to cut carbon emissions by businesses. The UK used to participate in the EU ETS, where member states issue operators in EU ETS with allowances. Further allowances would be auctioned by some governments (including the UK). The allowances could be traded and there is also a secondary market in which anybody can trade, for example to speculate on the price of the credits. Operators (or “polluters”) must ensure they have sufficient credits to cover their actual emissions at the end of April each year when these credits are “retired”. The new UK scheme broadly follows the EU scheme.
As emissions allowances can be bought and sold as a commodity attracting others into the market, this creates an opportunity for fraud. A domestic reverse charge means that the customer is liable to account for the VAT rather than the supplier. This removes the opportunity for the VAT to be stolen.
Policy objective
This is an anti-fraud measure which prevents a loophole thus removing the opportunity for fraudsters to charge VAT and then go missing before paying it over to the Exchequer.
Background to the measure
There has been no consultation on this measure. Businesses that already operate under the EU scheme will be familiar with the domestic reverse charge and how to account for the VAT.
Detailed proposal
Operative date
The operative date is 1 May 2021 and will apply to the trade in emissions allowances under UK ETS from 19 May 2021.
Current law
Section 1(2) of the VAT Act 1994 (VATA) makes the supplier liable for any VAT on supplies of goods or services.
Section 55A of VATA provides that the recipient of a supply must account for the VAT due on supplies of a kind specified in an order made by the Treasury.
The Value Added Tax (Section 55A) (Specified Goods and Services and Excepted Supplies) Order 2010 (SI 2010/2239) came into force on 1 November 2010. This applied the reverse charge to emissions allowances and international units traded under EU ETS.
Proposed revisions
A statutory instrument (SI) subject to the negative resolution procedure has been made under section 55A VATA to make taxable persons receiving supplies of emissions allowances under UK ETS liable to account for the VAT due on those supplies. The SI also removes the transfer of an “emission reduction unit”, the transfer of a “certified emission reduction” (international units) and “operator” from the scope of the domestic reverse charge. This is because EU ETS no longer allows for these international units to be exchanged for EU ETS allowances and UK ETS also does not allow for these international units to be exchanged for UK ETS allowances.
The SI was laid on 23 March 2021 and comes into effect on 1 May 2021.
Summary of impacts
Exchequer impact (£m)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| Nil | Nil | Nil | Nil | Nil | Nil |
This measure supports the Exchequer in its commitment to protect revenue.
Economic impact
This measure is not expected to have any economic impacts.
Impact on individuals, households and families
There is no impact on individuals as this measure only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on an estimated 1,300 businesses through this amendment to the reverse charge. These businesses will already be familiar with how to account for VAT under the domestic reverse charge and this measure does not change that process. One-off costs for affected businesses may include familiarisation with UK ETS rules introduced by BEIS. There are not expected to be any continuing costs. This measure is not expected to impact civil society organisations.
While the UK, as a whole, is no longer part of EU ETS, Northern Ireland electricity generators remain in EU ETS by virtue of Article 9 and Annex 4 of the Northern Ireland Protocol. There are fewer than twenty such businesses affected and this measure does not change the way in which they currently account for VAT on EU ETS allowances.
Operational impact (£m) (HMRC or other)
There are no financial consequences for HMRC.
Other impacts
As this measure does not change the way in which businesses account for VAT and the new UK ETS is a replacement for the EU ETS, HMRC does not expect any environmental impacts.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC will monitor the effectiveness of the amended domestic reverse charge to ensure that it covers the trading of emissions allowances under UK ETS. HMRC will also remain in contact with BEIS to ensure early notification of any future proposed changes to the scope of UK ETS.
Further advice
If you have any questions about this change, please contact Paul Grimwood on email: paul.grimwood@hmrc.gov.uk.
Declaration
The Rt Hon Jesse Norman MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.