UK to launch reverse VAT charges for CO2 trading

LONDON (Reuters) - Britain's tax authority will introduce reverse value-added tax (VAT) charges relating to carbon emissions trading from November 1, replacing a zero tax rate implemented last year to prevent fraud.

"Under the reverse charge accounting mechanism, it is the responsibility of the customer, rather than the supplier, to account to HM Revenue & Customs for VAT on supplies of the specified emission allowances," it said in a release on its website dated Friday.

The zero VAT rate was put in place in July 2009 as an interim measure to halt rapidly escalating carousel fraud in spot trading of European Union carbon permits, called EUAs, HMRC said.

European prosecutors are investigating a suspected 5 billion euro ($6.36 billion) tax fraud under the EU's Emissions Trading Scheme.

The new reverse charge will also apply to sales of two types of Kyoto Protocol carbon offsets called Certified Emissions Reductions (CERs) and Emissions Reduction Units (ERUs).

HMRC had been awaiting an EU-wide directive to provide a reverse charge option, which was finally adopted by members states in March.

Carousel fraud, also called missing trader fraud, occurs when companies buy carbon permits in one country without paying value-added tax (VAT) and sell them in another adding tax to the price but pocketing the difference for themselves.

Nearly 30 arrests have been made so far, with raids and other measures carried out in at least 11 countries including Spain, Norway, Denmark, Belgium, the Netherlands, the Czech Republic and Cyprus, prosecutors said.

The HMRC announcement can be read here: here

(Reporting by Michael Szabo; editing by Keiron Henderson)