Domestic reverse charge ― trading in carbon emissions

Produced by Tolley
Domestic reverse charge ― trading in carbon emissions

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Domestic reverse charge ― trading in carbon emissions
  • What are carbon credits / emissions allowances?
  • What are carbon offset services?
  • VAT treatment of cross-border supplies
  • VAT treatment of UK supplies
  • Zero-rating
  • Reverse charge
  • Supplies that are always excluded from the scope of the domestic reverse charge
  • Preparing for the introduction of the reverse charge

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

This guidance note provides an overview of the reverse charge provisions relating to trading in carbon emissions. See the Domestic reverse charge ― accounting requirements for details regarding what information needs to be shown on the VAT invoice and how to account for the reverse charge.

What are carbon credits / emissions allowances?

There are two types of credits: compliance market credits and Verified Emission Reduction (VER) (non-compliance credits).

Compliance market credits are derived from the Kyoto Protocol and the EU Emissions Trading System (EUETS). In 2005, the European Union introduced the Greenhouse Gas Emission Trading System (ETS). Under the system, each EU country has a carbon dioxide allowance each year and is divided between the installations that are covered by the scheme. If the business that has been allocated part of the allowance has any surplus allowance, this can be sold or banked.

Other organisations can also trade in emission allowances on the relevant markets. Trading can be within the EU on a carbon exchange and several EU countries have carbon exchanges in operation. The carbon allowance can be traded on a spot or forward basis and the transfers of the carbon allowance are treated as a supply of services from a VAT perspective.

Typical examples of compliance market credits are Emission Reduction Units (ERU), Certified Emission Reductions (CER) and EU Allowances (EUA).

VER (non-compliance credits) are in essence promises that the amount of carbon produced will be reduced somewhere around the globe. No particular service will be rendered by the parties involved

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