UK Government takes action to prevent VAT fraud in carbon trading

The UK has swiftly introduced new legislation to combat the possibility of VAT fraud relating to carbon trading in the UK.

With effect from 31 July, all supplies of carbon credits (EU emissions allowances and transferable units issued pursuant to the Kyoto Protocol) will be zero rated when traded in the UK. This legislation aims to eliminate the risk of VAT fraud, following recent developments where HM Revenue and Customs (HMRC) uncovered attempted UK tax fraud in the carbon emissions market.

This action follows recent similar moves in France and the Netherlands and may lead to an EU-level anti-fraud policy in the near future. The UK Government has sought a derogation from EU law to cover this short-term action pending agreement with EU on an EU-wide solution, effectively cutting through EU bureaucratic red tape associated with introducing new VAT legislation.

“It is important to note that this should not affect genuine businesses as a zero rated supply is still a taxable supply which means that although no VAT is charged, the seller can generally reclaim VAT on any purchases that relate to those sales.  However, it is extremely short notice and businesses will have to change their systems quickly especially when HMRC have confirmed that any VAT paid in error from 31 July 2009 will not be recoverable,” says Hannah Dobson, director at accountancy and financial services group Smith & Williamson.

This is the latest example of Missing Trader Intra Community (MTIC) fraud which has already cost the Exchequer millions of pounds of taxpayers’ money. MTIC fraud traditionally involved criminals importing goods such as mobile phones and computer chips VAT free from other European Union member states, and then selling the goods in the UK with the addition of VAT. Once the money was received from their customer the fraudsters would go missing without paying the VAT owed to HMRC.

“As always seems to be the case, the criminals got smarter. On reflection you probably couldn't have thought of a more vulnerable target for VAT fraud, a potentially high value intangible asset with no easy way of tracking and measuring the asset or its delivery,” continues Hannah.

This is a welcome move for UK businesses in this sector. HMRC recently issued a warning that genuine businesses may be jointly and severally liable for any VAT that went missing as a result of any fraud along the supply chain. This means that business owners and managers can concentrate on their business instead of carrying out time consuming verification on each of their suppliers.

For further information contact:
Hannah Dobson, director at Smith & Williamson
020 7131 8138
hannah.dobson@smith.williamson.co.uk 

PR enquiries to:
Jess Koslow/ Matthew Rowe 020 7131 4264/4550

Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.

Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International