USA HMRC announces that Voluntary Carbon Credits will be subject to VAT from 1 September 2024
Voluntary Carbon Credits (VCCs) are tradable certificates that represent the reduction or removal of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases (GHGs) from the atmosphere.
When introduced, HMRC was of the opinion VCCs fell outside the scope of UK VAT on the basis that they could not be incorporated into an onward supply and because there was no secondary market for them to be traded.
However, HMRC has updated its stance on this given substantial changes to the VCC market. Not only has a significant secondary market for certificate trading emerged but businesses have also been incorporating VCCs into their onward supplies. Due to these developments, HMRC has announced that VCCs will be taxable at the standard rate from 1 September 2024, where the place of supply is the UK – as outlined in “Revenue and Customs Brief – VAT treatment of voluntary carbon credits.”
In practical terms, this means that VCC transactions involving UK business customers will be subject to the standard rate of VAT. Unlike compliance credits (UK Emissions Trading Scheme allowances and EU Emissions Trading Scheme allowances) which are subject to the domestic reverse charge (DRC), VCCs are not proposed to be reverse chargeable.
HMRC’s latest brief has confirmed that the following transactions will remain outside the scope of UK 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
UK VAT will not be applicable in scenarios where VCCs are sold by UK businesses to overseas customers as those will be subject to the reverse charge in the normal way.
HMRC’s brief also notably outlines that VAT relief will be granted under the Terminal Markets Order (TMO) to contracts in taxable VCCs traded on terminal markets. As such, VCC trading by members under the TMO will be subject to the zero rate of UK VAT.
This updated guidance marks a substantial shift in HMRC’s policy amidst an already transforming UK carbon landscape. Businesses will need to apply extra diligence in ensuring the correct tax has been accounted for, particularly when applying the DRC.
Furthermore, HMRC’s announcement does raise questions around the historic tax treatment and the recoverability of input VAT on costs connected to VCC trading prior to 1 September. If HMRC has now adopted a position where VCC trading is representative of VAT supply due to trading on the secondary market and the onward supply of certificates, then clarification may need to be sought on the applicability of these factors to transactions before 1 September. Businesses with an eye on VAT recovery for any connected costs should assess their commercial contracts and economic transactions with particular care.
How can we help?
If you have any questions or want to understand how HMRC’s announcement affects your business, please speak to your usual contact or get in touch with our experts, Jayne Harrold, Hugh Doherty or Amanveer Singh.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.
