June 2024 VATWatch

Effective from the 1st September 2024 the sale of voluntary carbon credits will be treated as taxable for VAT where the place of supply is the UK.

Voluntary carbon credits were previously considered as outside of the scope of UK VAT but HMRC recognises that there have been significant changes in the voluntary carbon credit market, including the emergence of secondary market trading and businesses incorporation voluntary carbon credits into their onward supplies. As such, the updated policy means that VAT needs to be accounted for on certain trades of voluntary carbon credits at the standard rate.

However, the following activities are still outside of the scope of 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 of third-part verification.

Additionally, the Terminal Markets Order is considered within the updated policy. Currently it provides a VAT zero rate for wholesale commodity transactions made by members on specified terminal markets. From 1 September 2024, HMRC will allow the VAT relief granted under the Terminal Markets Order to apply to contracts in taxable voluntary carbon credits traded on terminal markets, within the terms of the relief.