One of the problems with the trading of carbon dioxide emissions is that this is a commodity that cannot be seen or for that matter, easily stored as a physical product! This has already created opportunities for irregular accounting and reporting - see for example an earlier Financial Times (FT) article on the dubious nature of carbon offsets traded via the voluntary market - and a concern noted in a previous blog that there is still little or no requirement for fiscal metering of emissions within the EU's trading system. Now, a case involving value added tax (VAT) fraud between companies registered in different parts of Europe has come to light.
This is called missing trader intra-community (MTIC) fraud and arises when standard-rated goods or services are traded VAT free between member states of the European Union (EU). Until a change notified by HM Revenue and Customs (HMRC) yesterday, a UK company would be required to charge a standard rate of tax (currently 15%) on emission allowances sold to another UK based company, but would not need to pay any VAT on allowances purchased from outside the UK. The fraud occurs when a UK registered company charges the tax but then fails to pay it to the Revenue and disappears.
HMRC has now decided to change the value added tax on traded emissions to zero (see Brief 46/09 issued 31st July) to prevent further abuse which according to a report in yesterday's Financial Times, may have approached several hundred millions of pounds in value. The paper also reports that signs of the fraud were first seen in May when French authorities noticed high trading volumes on the BlueNext Exchange. In the author's opinion, it is possible that this could also be linked to the availability of emissions following the large sell-off of in late 2008 / early 2009 (see earlier post).
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