VAT treatment of voluntary carbon credits

In the 2024 Spring Budget, the UK Government provided an update on its consultation and call for evidence on tax issues around environmental and ecosystem service markets. These markets include the voluntary carbon offset market, i.e. where carbon credits are sold to offset the purchasing companies’ (ideally residual) emissions.

Although the call for evidence did not cover VAT issues, the CLA’s response raised the uncertainty around the treatment of carbon and other ecosystem units for VAT purposes as an issue that the government had to deal with. In its reply, the government confirmed that it would update VAT rules that govern commodity trading - these enable trades through recognised markets such as the London Grain Futures Market to be zero rated - to include trading in carbon credits. While this would cover the large scale and high volume trading of credits through a recognised carbon credit trading market, updating these rules would not apply to the sale of credits by landowners.

HMRC has now published a Revenue Brief that sets out its position on the VAT treatment of transactions involving voluntary carbon credits on or after 1 September 2024. This means that for landowners that create and sell carbon credits after this date, they will have to account for VAT at the standard rate.

HMRC have yet to update their VAT manual to provide more detailed guidance, and clarity is needed as to whether carbon credits for this purpose includes selling pending issuance units.

Any members that are entering into agreements for the sale of carbon credits or pending issuance units should ensure this includes a contract term on VAT. This is because failure to specifically state that VAT is to be paid in addition to the agreed sum for the carbon credits, will mean that the price is deemed to be inclusive of VAT. This means that where carbon credits are sold by a VAT registered business, that business will have to account to HMRC for 20% of the sum received as output tax.

While clarity that carbon credits fall within the scope of VAT is helpful, similar clarity is required for other forms of natural capital units, including those relating to biodiversity net gain and nutrient neutrality.

The CLA will continue to ask for this in its ongoing discussions with HM Treasury and HMRC.