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
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
• 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.