New VAT rules for trading in greenhouse gas emission allowances within the State

Introduction

There is a change in the VAT treatment of domestic supplies of greenhouse gas emission allowances (sometimes called “carbon credits”) with effect from 8 April 2010. From that date, a reverse charge mechanism applies in relation to supplies, within the State, of these allowances. Up to now, the reverse charge mechanism applied to cross-border supplies, but not to domestic supplies.

The change implements EU Council Directive 2010/23/EU of 16 March 2010. This Directive amends Directive 2006/112/EC on the common system of value-added tax (the “VAT Directive”) as regards an optional and temporary application of the reverse charge mechanism in relation to supplies of certain services susceptible to fraud.

Greenhouse gas emission allowances, which are the subject of the new legislation, are allowances that are tradable under the EU Emissions Trading Scheme (EU ETS). These have been subject to fraud in other EU countries.

The new VAT provision was included in the Finance Act 2010, and is brought into effect by commencement order of the Minister for Finance.

What is the reverse charge mechanism?

Under the reverse charge mechanism, the obligation to pay VAT is shifted from the person making the supply onto the person receiving the supply. The reverse charge mechanism already operates in relation to cross-border trade in carbon credits. This legislation applies the reverse charge mechanism to domestic supplies of the credits.

The reverse charge mechanism is introduced to target VAT fraud. EU experience has shown that trade in carbon credits has become particularly susceptible to such fraud. The reverse charge mechanism combats the fraud by shifting the VAT liability from the supplier to the purchaser.

What do the new rules mean for suppliers?

Up to now, where a taxable person who carried on a business in the State supplied greenhouse gas emission allowances to another taxable person who carried on a business in the State, he or she charged VAT at the standard rate on the supply and accounted for that VAT to Revenue, while the recipient claimed a deduction for that VAT in his/her VAT return (subject to the normal deductibility rules).

Under the new rule with effect from 8 April 2010, the Irish-based supplier will no longer be liable for the VAT in respect of supplies made to customers in the State. The supplier of the carbon credits that are covered by the new rule will not charge VAT in respect of those supplies. However, the supplier must provide a document to the recipient indicating that the recipient is liable to account for the VAT. This document should also indicate such other particulars that would be included on an invoice (other than the amount of tax payable).

What do the new rules mean for purchasers?

Up to now, where a taxable person who carried on a business in the State purchased greenhouse gas emission allowances from another taxable person who carried on a business in the State, the purchaser was charged the VAT (at the standard rate) on the supply. If the purchaser was entitled to deductibility, he or she claimed a deduction in his or her VAT return for the tax that was charged.

Under the new rules, with effect from 8 April 2010, the Irish-based purchaser will no longer be charged the VAT on the supply, but is liable for the VAT (at the standard rate) in respect of allowances received under the reverse charge mechanism. The purchaser is obliged to account for the tax in his or her VAT return under the reverse charge rules. This tax is deductible for VAT purposes, under the normal rules that apply to deductibility. If a VAT-exempt business receives greenhouse gas emission allowances from another business in the State and is liable for the VAT under the reverse charge rule, it would not be entitled to deduct the VAT payable under this new provision (as it is not entitled to deductibility in the normal course of events).

Relevant Legislation:

The relevant legislation is in section 133 of Finance Act 2010. The Minister for Finance signed the Commencement Order for that section on 8 April 2010.