VAT – Zero rating of emissions allowances
New legislation designed to tackle VAT fraud involving tradeable emissions allowances has been introduced. The legislation came into force on 31 July 2009 as an urgent measure to combat fraud estimated to be in the range of hundreds of millions of pounds. The Government decided to act decisively to combat this fraud which, if left unchecked, could result in billions of pounds of tax losses.
The Value Added Tax (Emissions Allowances) Order 2009 will change the VAT status of emissions allowances to zero-rated (from standard rated). This is intended as an interim solution pending an EU led solution to the problem. The UK move follows similar action by France and the Netherlands over the last few months.
The zero-rate will apply to any transaction in EU emissions allowances and transferable units issued pursuant to the Kyoto Protocol. This will include ‘over the counter’ spot trades, transactions for future delivery and options. Cross-border transactions are not affected.
HMRC recommends that as the underlying reason for this change is to combat fraud that businesses should ensure they stop paying VAT on all affected purchases from 31 July 2009 as these supplies are now zero-rated.