Tax Fraudsters Eye Opportunities In Carbon Trading Markets

by Jason Gorringe, Tax-News.com, London

22 July 2009

European Union member states are taking action to prevent ‘carousel’ value-added tax (VAT) fraud from spreading to the nascent market for trading in carbon permits.

The United Kingdom has become the latest country to detect fraudulent transactions taking place on the carbon exchange, according to the Daily Telegraph, although HM Revenue and Customs has declined to confirm the size of what is thought to be first tax fraud of its type in the UK.

Other EU member states which have taken action to nip the problem in the bud include France, which last month made carbon permits exempt from VAT, and the Netherlands, which is introducing a reverse charge mechanism.

Carousel VAT fraud, or Missing Trader Intra-Community fraud, to give it its official title, occurs where a person liable for value-added tax who has acquired goods or services within the European Union on which no VAT has been paid subsequently supplies these goods or services within the Community with VAT imposed but then ‘disappears’ without paying the VAT to the Exchequer. The name carousel fraud derives from the typical circular chain of transactions set up to maximize the profits before the missing trader 'disappears'. In order to dissimulate the fraud, the circle sometimes involves compliant honest traders.

It is thought that criminal elements have begun to move into the carbon market, setting up companies to buy carbon credits which are sold on through the carbon exchange with VAT added, then disappearing before paying the requisite VAT to the government.

While the Dutch carbon exchange, Climex, has reported no instances of VAT fraud in its trading activity, deputy finance minister Jan Kees de Jager has announced that the government will, nevertheless, amend the law so that the onus for VAT accounting will be placed on the buyer rather than the seller.

"In order to do away with uncertainty for buyers, I have decided that entrepreneurs who sell emissions rights will simply mark the bill with 'turnover tax transferred,' he said in a statement. “The buyer will then insert the tax into his or her tax return."

The European Commission, which prefers such matters to be handled on a unified, rather than unilateral, basis, is also likely to respond to the VAT fraud threat in the carbon trading markets in due course.

The carbon trading market, while in its infancy, is big business and growing fast. The EU Emissions Trading Scheme (ETS), which sets a cap on the total emissions from the main industrial sectors across Europe, covers more than 10,000 installations in the energy and industrial sectors. The UK is one of the member states going furthest on auctioning in phase II of the scheme, which runs from 2008 to 2012.

The UK National Allocation Plan for the second phase of trading in the EU ETS sets aside 7% of the allowance cap for auctioning, amounting to approximately 85 million allowances over the phase.

Despite the turmoil in the financial world, 2008 saw a doubling of the global carbon market, to an estimated value of more than USD126bn, according to the latest State and Trends of the Carbon Market Report 2009, released by the World Bank in May.

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