Until now, voluntary carbon credits have been outside the scope of UK VAT. With effect from 1 September 2024, the trade of voluntary carbon credits will become taxable at the standard rate (20%) for VAT purposes if the place of supply is in the UK.
Voluntary carbon credits should be distinguished from compliance market credits. The latter are credits used to provide economic incentives by making it more expensive for organisations to pollute. The UK uses a cap and collar regime which works on the basis that a cap is set on the total amount of greenhouse gases that can be emitted. Over time that cap reduces with the result that emissions fall. The regime is aimed at emitters of high levels of greenhouse gases and those entities are required to surrender enough allowances to cover their annual production of emissions otherwise fines are levied. There is a primary and secondary market for compliance market credits and in the UK compliance market credits are already subject to VAT at the standard rate.
In comparison, the trade of voluntary carbon credits is optional and the markets are not government regulated. Voluntary carbon credits cannot be used to meet greenhouse gas emissions targets and are used mostly by organisations and individuals who want to take responsibility for their own carbon footprint. As a result, the supply of voluntary carbon credits has fallen outside of the scope of the UK VAT regime because, in the view of HMRC, the sale of those credits, whilst resulting in a benefit or being of social value, was not the delivery of service which is being consumed by the buyer of the voluntary carbon credit.
Given the growth in the voluntary carbon credit market however, HMRC has changed its view and in ‘Revenue and Customs Brief — VAT treatment of voluntary carbon credits’ which was published on 9 May 2024 (Revenue and Customs Brief — VAT treatment of voluntary carbon credits), confirms that:
HMRC recognises that there have 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. Because of this, 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.
The brief sets out activities that will remain outside of the scope of UK VAT. Excluded activities include:
In addition, the brief confirms that the zero-rated relief provided for under the Terminal Markets Order (TMO) will be extended to the supply of taxable voluntary carbon credits from 1 September 2024. A description of the services that qualify for that relief can be found here Commodities and terminal markets (VAT Notice 701/9).
If you require advice on the issues raised in this article, please contact Cathy Bryant or Anthony Reeves in our Corporate Tax team.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our Anthony Reeves or Cathy Bryant at Michelmores LLP should you require advice concerning any of the above.
