New VAT treatment of voluntary carbon credits

29 May 2024| CATEGORIES: carbon credits, New VAT policy| TAGS: new VAT rules, Terminal Markets Order, voluntary carbon credits

HMRC have published RCB 7 (2024) on the VAT treatment of voluntary carbon credits.

The brief explains:

• the VAT treatment of voluntary carbon credits from 1 September 2024;
• the voluntary carbon credits that will be in the scope of the Terminal Markets Order.

Background

The updated guidance will take effect from 1 September 2024 and will apply to transactions involving voluntary carbon credits on or after that date.

A carbon credit is a tradable instrument issued by an independently verified carbon-crediting programme. It represents a reduction or removal of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases (GHGs) from the atmosphere measured by reference to a baseline scenario. Voluntary carbon credits are any carbon credits that are not compliance market credits.

Voluntary carbon credits are currently treated as outside the scope of UK VAT. This is because when they were first introduced, HMRC’s view was that they could not be incorporated into an onward supply and there was no evidence of a secondary market.

There have since been significant changes in the voluntary carbon credit market, including the emergence of secondary market trading and businesses incorporating voluntary carbon credits into their onward supplies. As a result HMRC have announced that, from 1 September 2024, the sale of these carbon credits must be treated as taxable for VAT where the place of supply is in the UK.

New HMRC policy

From 1 September 2024 VAT needs to be accounted for on certain trades of voluntary carbon credits at the standard rate.

The following activities are still outside the scope of VAT:

• the first issue of a voluntary carbon credit by a public authority;
• the holding of voluntary carbon credits as an investment, where there is no economic activity;
• donations made to voluntary carbon credit projects;
• sales of voluntary carbon credits from self-assessed projects with no independent or third-party verification.

Voluntary carbon credits in the scope of the Terminal Markets Order

The Terminal Markets Order (see VAT Notice 701/9) provides a VAT zero rate for wholesale commodity transactions made by members on specified terminal markets.

From 1 September 2024, HMRC will allow the VAT relief granted under the Terminal Markets Order to apply to contracts in taxable voluntary carbon credits traded on terminal markets, within the terms of the relief.

Businesses in the environmental services market who create, buy or sell voluntary carbon credits, as well as exchanges that operate voluntary carbon markets should familiarise themselves with the new rules and plan the necessary IT changes in time for September 2024.