July 30, 2009 8:53 pm

Treasury acts on carbon-credit fraud fears

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Drastic action to stop a potential multi-billion-pound fraud was taken by the UK Treasury on Thursday when it imposed a zero rate of value added tax on carbon credits – the allowances issued as part of a scheme to help curb greenhouse gas emissions.

Losses to the exchequer so far are unlikely to have exceeded a few hundred millions pounds, but the Treasury said in a statement that “there now exists a substantiated and increasing risk of the UK becoming a major target for the fraudsters during the next few months”.

The move is highly unusual because changes to VAT need to be agreed by the European Parliament. The decision to press ahead with the change without prior permission reflects the severity of the threat posed by the fraud. Similar steps have already been taken by France and the Netherlands.

The ease of trading carbon credits means that the fraud, if unchecked, could have been even more costly than similar VAT frauds committed with mobile telephones and computer chips. These cost many billions, but have now been substantially reduced by changes to the VAT system.

The Treasury said: “We have seen how quickly frauds of this kind can escalate and how effective decisive action can be in tackling them.”

The fraud, known as missing trader intra-community fraud, can arise because goods or services are allowed to be traded VAT-free between member states.

It occurs where the UK company purchasing the emissions allowances from overseas sells them to another UK company, charges VAT but then fails to pay it to Revenue and Customs, and disappears.

Zero-rating the carbon emissions allowances would have a negligible cost to business but would in effect remove the opportunity to perpetrate fraud, the Treasury said.

Robert Print, assistant manager of KPMG’s carbon advisory group, said: “We welcome the UK being proactive to ensure the legitimacy of the market.”

However, he voiced concern about the different responses to the threat being taken across Europe. He noted that the Netherlands had opted for a “reverse charge”, requiring all traders to account for VAT at the time of purchase, and France had exempted the allowances from VAT, while all other member states except Britain charged a standard rate of VAT. “The fact there are four different VAT treatments across the European Union highlights the need for co-ordinated action,” he said.

Emissions allowances or “carbon credits” are issued by governments in Europe under a scheme designed to cut carbon emissions by businesses.

The allowances can be traded and there is also a secondary market in which anybody can trade, for example to speculate on the price of the credits. The companies must ensure that they have sufficient credits to cover their actual emissions at the end of April each year, when these credits are “retired”.

Although the ability to trade freely in emissions allowances is an important feature of the EU emissions trading scheme, it exposes the market to fraud because of the high volume, value and speed of the trades. Moreover, the fact that the allowances are surrendered only once a year provides fraudsters with opportunities to steal VAT following cross-border acquisitions.

The first signs of the migration of the fraud into carbon trading was in May, when the BlueNext exchange was temporarily shut down after a sustained period of unusually high trading volumes led the French authorities to suspect there might have been fraudulent transactions taking place.

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