HMRC have published 'Revenue and Customs Brief 7 (2024): VAT Treatment of Voluntary Carbon Credits' which covers the treatment of voluntary carbon credits from 1 September 2024.

This Brief is relevant to businesses and their agents working in the environmental services market who create, buy or sell voluntary carbon credits, along with exchanges that operate voluntary carbon markets. It applies to transactions involving voluntary carbon credits on or after the start date.

What is a carbon credit? It is a tradable instrument issued by an independently verified carbon-crediting programme. A unit of credit arises where there is a reduction or removal of one metric tonne of CO2 or an equivalent amount of greenhouse gases from the atmosphere measured by reference to a baseline scenario.

As the name suggests, a voluntary credit is not required for compliance.

To date, the voluntary credits have been treated as Outside the scope of UK VAT.  Historically, HMRC saw no evidence of a secondary market for them and did not believe they could be incorporated into an onward supply chain, but there has been significant change in the voluntary carbon credit market and both these objections have been surmounted. Hence, the sale of these carbon credits must be treated as Taxable for VAT from 1 September 2024 where the place of supply is the UK.

Some supplies remain outside the scope of VAT:

  • The first issue of a voluntary carbon credit by a public authority.
  • The holding of voluntary carbon credits as an investment in a situation where there is no economic activity.
  • Donations made to voluntary carbon credit projects.
  • Sales of voluntary carbon credits from self-assessed projects with no independent or third-party verification.

From 1 September 2024, HMRC will allow the VAT relief granted under the Terminal Markets Order (VAT Notice 701/9) to apply to contracts in taxable voluntary carbon credits traded on terminal markets within the terms of the relief.

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