30 Sep 2010

VAT – reverse charge accounting for trading in emissions allowances

In August 2009, we advised clients of changes in the VAT treatment of trading in emissions allowances.  These were needed to counter an escalating threat of Missing Trader Intra-Community (MTIC) VAT fraud.  The effect was that, from 31 July 2009 trading of emissions allowances were to be generally zero-rated, rather than taxable at the standard rate. The changes, at that point, were just an interim measure, pending the agreement of a common EU approach. 

An EU Directive was eventually adopted in March 2010, allowing Member States to introduce a reverse-charge.  Section 50 FA 2010 provided the enabling UK legislation and implementing secondary law was laid on 9 September.  The rules will affect only business-to-business transactions in the UK and the start date is 1 November 2010. 

The way the new rules will work is that, from 1 November 2010: 

  • the zero-rate will no longer apply; but 
  • the customer, rather than the supplier, becomes liable to account to HMRC for any output VAT due;  
  • there is no ‘de-minimis’ rule, so the reverse charge applies to all specified supplies of emission allowances; however, 
  • unlike the similar rules for mobile phones and computer chips, businesses will not be required to complete a Reverse Charge Sales List.

 The changes will have an effect on the VAT returns of both suppliers and customers and on the invoices raised by the supplier.

 The new rules will apply to:

  • transfers of allowances, as defined in Article 3 of Directive 2003/87/EC (concerning the EU emissions trading scheme);
  • transfers of emission reduction units which can be used by an operator for compliance with the scheme established by the Directive; and
  • transfers of certified emission reductions which can be used by an operator for compliance with the scheme established by the Directive but not to supplies of options for emissions allowances which are not covered by the EU legislation.

These changes do not affect the application of the Terminal Markets Order under which certain transactions on specified markets are zero-rated.

Detailed guidance can be found in HMRC Notice 735: VAT reverse charge for mobile phones & computer chips.

Anyone wishing to discuss this, especially the important impact on the VAT returns of both suppliers and customers and on the invoices raised by the supplier, should contact Peter Landon or their usual CWE contact. 


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