UK introduces VAT reverse charge on renewable energy guarantees of origin

Out-Law News | 13 Jun 2019 | 3:56 pm | 1 min. read

The UK is introducing a VAT reverse charge for supplies of renewable energy certificates with effect from 14 June 2019.

“It is positive that HMRC have introduced the reverse charge, which will remove the VAT fraud risk posed by defaulting traders. However, having faced similar problems a decade ago in the carbon credit market, it is nevertheless surprising that the UK has lagged behind a number of EU countries in introducing the measure," said Stuart Walsh, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

Electricity suppliers in the UK must disclose annually to customers and potential customers the mix of fuels used to generate the electricity they supply. This must be backed up by evidence in the form of EU GOs, referred to as renewable energy guarantees of origin, or 'REGOs', in the UK. GOs can be traded separately from the electricity they relate to.

GOs purchased from suppliers in another EU member state will be zero-rated for VAT purposes. Until now, when on-sold in the UK GOs have been subject to VAT at the standard rate. This has meant that fraudsters have been able to use GO trades to defraud HMRC of VAT by buying the certificates from another EU member state VAT-free, onward selling to UK purchasers charging VAT but then failing to pay that VAT to HMRC. This is called missing trader intra-community (MTIC) VAT fraud.

Walsh Stuart

Stuart Walsh

Partner

It is surprising that the UK has lagged behind a number of EU countries in introducing the measure

A reverse charge means that the customer is liable to account for the VAT rather than the supplier. This removes the opportunity for the VAT to be stolen.

The reverse charge mechanism already applies to other goods and services susceptible to MTIC fraud such as mobile phones, computer chips and emissions allowances. Since 2014 it has applied to supplies of wholesale gas and electricity. 

“Electricity suppliers and other companies who buy GOs need to change their systems and procedures urgently to account for the reverse charge. They could find themselves out of pocket if they pay the VAT to the seller of a GO, instead of applying the reverse charge,” said Clara Boyd, another tax disputes expert at Pinsent Masons.

Last month HMRC warned energy businesses of the risk of being caught up in VAT fraud relating to GOs.