VAT Changes on Carbon Credits Affect the UK

VAT Changes on Carbon Credits Affect the UK

New guidance from His Majesty’s Revenue and Customs (HMRC) have clarified forthcoming changes to the treatment of Value Added Tax (VAT) on voluntary carbon credits. These changes will be effective from 1 September 2024.

Understanding these changes is critical for businesses involved in creating, buying, or selling voluntary carbon credits.

What is a carbon credit?

A carbon credit is a certificate that signifies the reduction or removal of one metric tonne of carbon dioxide or equivalent greenhouse gases from the atmosphere. Carbon credits have two types: mandatory and voluntary, with voluntary credits not required by law. Traditionally, voluntary carbon credits were not taxed with VAT because they were rarely traded again and seldom included in further business transactions.

Why are voluntary credits now VAT relevant?

Originally, HMRC was of the view that there was no evidence of a secondary market for voluntary credits. This has changed, with credits actively being sold and incorporated into onward supplies. As a result, businesses will soon have to account for VAT on a selection of transactions involving voluntary credits. If you are trading, whether it be selling or buying voluntary credits, it now has VAT treatment with it.

Are there exceptions to the new rules?

Given the dynamic nature of VAT regulations, especially in the United Kingdom, businesses should enlist experts to ensure they effectively navigate compliance requirements. With the new scheme on carbon credits, there are already certain exceptions that require special insight and expertise.

The following activities will not fall into the scope of VAT:

  • The first issue of a voluntary carbon credit by a public authority.
  • The holding of voluntary credits as an investment, where there is no economic activity.
  • Donations made to voluntary credit projects.
  • The sale of voluntary credits from self-assessed projects where there is no independent verification.

Under the Terminal Markets Order, transactions of wholesale commodities on specific markets are exempt from VAT. Starting from the same effective date, this VAT exemption will also apply to voluntary carbon credits traded on these markets. This policy aims to improve the trading activity and financial health of environmental commodities within regulated markets.

What next?

While the above offers a brief glimpse of the changing compliance landscape, it remains essential that affected parties seek the best possible expertise. Businesses should stay informed and prepare for the upcoming changes.

VAT IT Compliance can assist even the most sophisticated in-house tax teams to help ensure your business has specialist support with its indirect tax affairs. Whether you’re a small business or a large multinational, we have the skills and experience you need to remain compliant.