The UK hopes that new rules introduced today will eliminate a multibillion-pound tax fraud involving carbon credits.
Carousel fraud, or missing trader fraud, is estimated to have cost EU member states up to €5bn (£4.3bn) in lost tax revenue before a crackdown earlier this year led to a string of arrests across the continent.
Fraudsters used front companies to sell carbon credits, before pocketing the VAT charged on those trades and closing down the companies. At the height of the fraud, Europol estimated that up to 90 per cent of the whole market volume of trading was being perpetrated by fraudsters.
But from today HMRC has imposed new rules that require purchasers rather than suppliers of carbon credits to notify the tax man of the trade and account for the VAT on all emissions products eligible within the EU Emissions Trading System, including European Union Allowances, Certified Emissions Reductions and Emissions Reduction Units.
The so-called reverse charge system replaces HMRC's interim measure of imposing a zero VAT rating on carbon allowances, which it introduced in July 2009 and only agreed to remove following an EU agreement in March that allowed the new VAT system to be introduced.
The reverse charge mechanism has also been used to combat carousel fraud in mobile phones and computer chips and Jonathan Main, a tax partner at PwC, said the EU's carbon market, worth £74bn last year, was likely to benefit from the changes.
"Legitimate traders and businesses are the ones that get caught in the crossfire in carousel frauds like this, so they will welcome this change," he said. "We will have to wait and see if this has a real impact on the volumes traded, but it will make life a lot simpler for those serious traders and market players involved."
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