Carbon Trading Fraud Being Targeted by New VAT Rule

Jack Humphrey, Regulatory journalist
November 02, 2010 /

The new VAT rules that were imposed today aim at eradicating a multi billion ‘carousel’ fraud in European carbon trading markets that had taken over the market.
From now on, VAT payments on all carbon emission products that are eligible within the European Union Emissions Trading System can now be accounted for under the ‘reverse charge mechanism’.

The new VAT rules will mean that now the customer, rather than the supplier, will be informing of the credits to the HMRC (HM Revenue & Customs) for the accounts and trade of the due VAT.

The EU Emissions Trading System, which was estimated to be worth £74 billion last year, is the world’s largest carbon market. In it, the financial markets of London play a dominant role.

The Carousel fraud has been estimated to have cost the European Union €5 billion (£4.3 billion) as lost tax revenues.

In the month of March this year, the Union had published a directive that had enabled reverse charge mechanism to be applied. The new regulation had replaced interim measure of zero rating VAT on carbon allowances that applied to Certified Emissions Reductions (CERs), Emissions Reduction Units (ERUs) and the European Union Allowances (EUAs).

The Carousel fraud, emerged from many major EU carbon trading nations in the year 2009 and EuroPol, which is the European law enforcement law organization, said that it estimated that around €5 billion of tax revenues were lost.

At the height of the Carousel fraud, up to 90% of the total market volume was being caused due to it.

During that time, trade was being made through unregulated brokers, who were selling the allowances on a carbon spot trading exchange. Much of the trade was being conducted through buffer companies.

In April, 21 people were arrested by the HMRC as part of an investigation into tax evasion on carbon credits.


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