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HMRC officers have arrested seven people in connection with a suspected £38 million VAT fraud.

The suspected fraud involves the trading of emissions allowances (often called ‘carbon credits’). Seven people were arrested in the Gravesend and Greater London areas and twenty seven properties, both business and residential, were searched.  Further arrests are likely and the investigation continues.

Those arrested are believed to be part of an organised crime group operating a network of companies trading large volumes of high-value carbon credits. The fraudulent companies purchase carbon credits from overseas VAT free sources and then sell them on to businesses in the UK at a VAT inclusive price. The VAT charged by the fraudulent companies is never paid to HMRC. It is thought that the proceeds of this crime have then been used to finance lavish life styles and the purchase of prestige vehicles.

Commenting on the investigation, Les Beaumont, Deputy Director of Criminal Investigation for HMRC said "HMRC investigates all criminal attacks on the tax system, halting theft of revenue, gathering evidence and supporting prosecutors in bringing offenders before the courts. We always aim to recover the proceeds of crime, restoring that money to the public purse where it belongs.  That is our intention in this and all similar cases. The Government took decisive action to prevent this type of fraud recurring by zero rating carbon credits for VAT."

The opportunity for Missing Trader Intra-Community (MTIC) VAT fraud arises where standard-rated goods or services can effectively be traded VAT free between EU Member States.  Up to now, most emissions allowances have been standard-rated in UK to UK transactions and VAT free when purchased from outside the UK by a UK based company.  It is this VAT free source that provides the opportunity to perpetrate MTIC VAT fraud.  It occurs where the UK company purchasing the emissions allowances from overseas sells them to another UK company, charges VAT but then fails to pay it over to HMRC and disappears.

In response to the escalating threat of VAT fraud in connection with trading of emissions allowances the Government introduced legislation to zero rate the supply of emissions allowances within the UK with effect from 31 July 2009.  This is an interim measure that the Government expects to remain in force until an EU-wide solution is implemented.  It follows similar action taken by France and the Netherlands earlier in the summer.  However, despite this change, HMRC still intends to pursue relentlessly those that may have used carbon credit trading to cheat the public purse.