HM Revenue & Customs (HMRC) officers have arrested seven people in connection with a suspected £38 million VAT fraud involving the trading of carbon credits.

In addition to making the arrests in the Gravesend and Greater London areas, officers also searched 27 properties, both business and residential. 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 companies are suspected of purchasing carbon credits from overseas VAT-free sources and then selling 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.

“The Government took decisive action to prevent this type of fraud recurring by zero-rating carbon credits for VAT,” said Les Beaumont, deputy director of criminal investigation for HMRC.

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.

HMRC estimates that the potential impact on VAT receipts in 2005–06 was between £2 billion and £3 billion.

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