Starting September 2024, voluntary carbon credits in the UK will be subject to VAT, according to a new policy announced by HM Revenue & Customs (HMRC). This change will require businesses involved in the creation, sale, or purchase of carbon credits to scrutinise their commercial agreements.
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Voluntary carbon credits allow companies to offset emissions beyond regulatory requirements and are traded in global markets established under international accords, including the 2015 Paris Agreement.
The UK's emissions trading scheme (ETS) operates separately from the voluntary carbon market, focusing on auctioning carbon credits to meet the nation's 2050 net-zero target.
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HMRC's policy shift recognises the development of secondary trading markets for voluntary carbon credits, now incorporated into onward supplies of goods and services.
Previously, voluntary carbon credits were outside the scope of UK VAT, due to a lack of secondary market evidence. This view has changed with the market's evolution and growth, prompting the new VAT treatment from September 2024.
The standard VAT rate of 20% will generally apply, with certain exemptions. Such exemptions include the first issuance of a credit by a public authority, holding credits as non-economic investments, donations to carbon projects, and sales from self-assessed projects lacking third-party verification.
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Tax expert Bryn Reynolds from Pinsent Masons emphasised the significance of this policy change, urging businesses to review their contracts and VAT application processes to avoid unintended financial impacts.
The updated HMRC guidance will come into effect on 1 September 2024, impacting all transactions involving voluntary carbon credits from that date onward.
Carbon credits, also known as carbon units, provide a practical way for individuals and businesses to engage in environmental action. By using DGB Group’s verified carbon units to compensate for past and irreducible emissions from activities like travel or broader corporate operations, everyone can play a part in the global mission to reduce environmental degradation and promote sustainability. With upcoming VAT changes on the horizon, now is the ideal time to invest in carbon units and make a meaningful contribution to a greener future.
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