Carbon VAT fraud crackdown

Recent VAT fraud by EU companies trading their carbon emissions allowances has forced the UK Treasury to take preventative action, imposing a temporary zero rate of VAT on all trading on 31 July. France has been victim to high levels of VAT fraud on carbon emissions trading and the UK Treasury discovered the beginnings of the same practices here. It is tackling the issue now before more serious problems occur.

The change is expected to prevent companies from fraudulently receiving VAT reimbursements on carbon trades where the VAT has not been paid in the first place. The scam is similar to carousel fraud, but carbon emissions certificates are easier to trade and more transferable, as opposed to fraud relating to physical goods.

In France, which has had zero-rated VAT (known as TVA), a company would sell emissions credits to another company and then declare itself bankrupt without having paid the VAT charge on the trade. The company that bought the emissions allowance would then seek reimbursement from the relevant tax authority.

An example provided by KPMG explains:
• Company A (based in France) sells a number of carbon credits to Company B (also based in France) and charges Company B French VAT (TVA);
• Company A (the seller) should pay the associated TVA to the tax authority, but is declared bankrupt before doing so;
• Company B (the buyer) claims back the TVA it paid to Company A from the tax authority;
• The tax authority has not been paid the TVA by Company A, but has paid the equivalent to Company B; and
• Company B sells the carbon asset to Company C (a non-French buyer) and does not charge VAT, as long as the buyer is based outside of France.
The UK treasury’s preventative action is in place until the EC comes up with a permanent solution. The EC has noted the levels of VAT fraud taking place in certain EU countries and is looking at what can be done to alleviate the problem across all 27 member states.

The two most favourable changes are a permanent zero rate of VAT for carbon emission trading, or implementing “reverse payments” where the buyer pays the VAT to the tax authority and is simultaneously reimbursed. In the latter instance the buyer fills in a form for what the VAT payment and reimbursement should be, producing a net total of nil. Holland is currently using this method.

At the moment, the only countries to have imposed a change in the rate of VAT are France, the Netherlands and the UK.

Useful links
http://tinyurl.com/carbonVAT
http://tinyurl.com/KPMGcarbonVAT