HMRC provides guidance on VAT and voluntary carbon credits

13 May 2024

carbon credits

HMRC has just published a brief regarding the VAT treatment of voluntary carbon credits from September 2024 at which time the sale of these credits will become taxable for VAT where their sale is in the UK.

Guidance has also been issued on voluntary carbon credits and the scope of the Terminal Markets Order.

HMRC says that the brief is relevant to businesses and their agents in the environmental services market who create, buy or sell voluntary carbon credits, and exchanges that take place within this market.

Voluntary carbon credits have been treated outside the scope of UK VAT creating a potential VAT cost for businesses generating credits, and the sector for some time has been seeking clarity given this is a rapidly developing market.  HMRC has now recognised that there have been significant changes since the inception of the market including secondary market trading, and voluntary carbon credits being incorporated into businesses’ onward supplies. Consequently, HMRC has reached the position that from September 2024 the sale of these carbon credits will be taxable for VAT where that supply is in the UK.

HMRC has also advised that there are some activities that will still fall outside the scope of VAT including the first issue of a voluntary carbon credit by a public authority; the holding of carbon credits as an investment where there is no economic activity; donations made to voluntary carbon credit projects; and sales of voluntary carbon credits from self-assessed projects with no independent or third-party verification.

With regard to the Terminal Markets Order this provides a zero rate of VAT for wholesale transactions made by members on specified terminal markets.  From 1 September 2024, HMRC has stated that it will allow 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.

John Butterfield, VAT Director, and a member of the firm’s Land and Rural Practice Group, says:

“This announcement brings some much-needed clarity on the issue of VAT and voluntary carbon credits and is good news for business generating and selling independently verified voluntary carbon credits in that it should remove the VAT cost. However, there are still a number of areas that remain under review, for example pending issuance units (PIUs), Biodiversity Net Gain and nutrient credits, and also what the approach is for the past, and up to 1 September 2024 as HMRC’s existing guidance could be disadvantageous in certain circumstances. We hope that there will be further guidance issued in relation to these areas at the earliest opportunity.”

The full brief on VAT treatment of voluntary carbon credits is available on the government website.

For any further information, please contact John Butterfield.

Contact Us

John Butterfield
Director, London

Key experience

John is an experienced VAT professional and he has been working in VAT since 1997, originally as an officer with...