VAT treatment of voluntary carbon credits

30 May 2024

Ariel view of forest

In a Revenue and Customs Brief dated 9 May 2024, HMRC announced a change in the VAT treatment of voluntary carbon credits. Voluntary carbon credits are defined by HMRC as any carbon credits which are not “compliance market” credits, which are part of the UK Emissions Trading Scheme.

Their guidance had previously been that income received from the sale of voluntary carbon credits did not relate to a business activity by the seller and was not therefore subject to VAT.

In view of the growth and development of this market over the last 10 years, HMRC have now reached the view that income from the sale of such credits is subject to VAT provided that certain conditions are met and have announced that this change in treatment will apply from 1 September 2024.

The broad conditions for falling within the scope of VAT are that a tradeable instrument is issued in respect of a carbon credit which indicates that independent verification, registration and management of the issue of the credits is in place. This VAT treatment applies to units which are verified and issued both before and after the removal or reduction of carbon has taken place.

The clarity which HMRC hasve now provided is welcome, but leaves some areas for further consideration for businesses in this sector. For example, businesses which have already incurred costs and sold credits in advance of the date of the change may need to review their treatment to ensure that there are no adverse consequences from a VAT perspective. There has also been no update from HMRC in terms of their view of the VAT treatment of other environment related payments such as Biodiversity Net Gain and Nutrient Neutrality, although we understand that these areas remain under consideration.

Further information from the government on the VAT treatment of voluntary carbon credits is available.

If you have any queries on this topic, please get in touch with either Wendy Andrews or Aalia Ahmed.

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Wendy Andrews
Director, London

Key experience

Wendy is a Director in the VAT Team and advises clients on issues including charity/not-for-profit VAT, international supply chain issues...